Free Trial

MNI POLICY:BOE Calls For Managed Financial Services Divergence

--BOE Woods: UK Should Be Upfront With EU Saying Financial Services Aim Is
Managed Divergence
--Bailey: Equivalence At Outset Looks Logical But Divergence To Follow
By David Robinson
     LONDON (MNI) - A top UK regulator told lawmakers that the country's
negotiators should make it clear from the outset that they are not seeking to
maintain full equivalence with the European Union on financial service
regulation but instead looking at ways of managing divergence whilst preserving
access to EU markets.
     Bank of England official Sam Woods, who is deputy governor for prudential
regulation, argued that while it should be straightforward for the UK to be
granted equivalence once it and the EU have completed the work in June this
year, that it should be made crystal clear that what matters was finding a way
to allow the two regulatory regimes to start to diverge.
     "It is better to acknowledge that we are moving into a process of managing
divergence here. Because if you enter equivalence with some kind of notion that
you are going to stay exactly the same well, that will rapidly come asunder and
could come asunder in a way that would cause bad faith," he told the House of
Lords EU Financial Affairs sub-Committee.
     Woods' views chimed with those expressed by Andrew Bailey, the Financial
Conduct Authority head who has been named as the next Bank of England governor.
Bailey told the lawmakers that it would be hard to argue that the UK was not
equivalent on day 1 but the question then was what would be the scope for
sensible divergence.
     Under current rules the EU can grant equivalence but then withdraw it with
30 days' notice if it detects divergence. Bailey and Woods are pushing for a
more stable regime that avoids this potential cliff-edge, which would leave UK
financial service firms having to live with the threat of having EU access cut
off at short-notice.
     Equivalence is a unilateral designation by the EU of a third country as
having a sufficiently similar level of regulation in a specific sector. Bailey
said what mattered was creating structures to allow the EU and UK officials to
change regulations without triggering a threat of withdrawing equivalence.
     "If that ended up in a metaphorical punch-up every time and a threat to
withdraw equivalence, that process would just not work properly," he said.
     He added that Chancellor of the Exchequer Sajid Javid was keen to see a
more durable framework created to diminish uncertainty for the financial
services sector.
     He said that the threat of sudden withdrawal of equivalence "is something
we should be concerned about; plainly it could occur."
     Both Woods and Bailey acknowledged that there was a risk that EU members
would be tempted to fuel uncertainty over regulation to facilitate their
capturing of parts of the UK financial services sector.
     With life insurance markets essentially still national, and share trading
fragmented, Woods cited investment banking as the most natural-cross border EU
financial services business. The major investment banks have already bolstered
their continental European operations as insurance against regulatory disruption
of their London operations that service the EU.
     Woods said that he had a team that was already up and running on the
equivalence assessment.
     "This ought not to be tremendously demanding given the position that we are
starting from but nonetheless there are things to be gone through. What I am
still in the dark about is exactly how our EU colleagues are going to pursue
that," he said.
     "I suspect it will end in the form of an extremely long questionnaire which
we will have to fill in," he added.
     Current BOE Governor Mark Carney said in evidence to a Lords Committee
Tuesday that the Bank's January Monetary Policy Report economic projections had
assumed that there would be frictions with the EU, with "some regulatory
divergence over time" and the loss of EU access for some financial services
feeding through to "a relatively modest growth profile."
--MNI London Bureau; tel: +44 203-586-2223; email:
[TOPICS: M$B$$$,M$E$$$,M$X$$$,MT$$$$,M$$BE$,M$$EC$,MGB$$$,MGX$$$]

To read the full story



MNI is the leading provider

of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.

Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.