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.

     --DURABLE FRAMEWORK

     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: david.robinson@marketnews.com

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