Equivalence is dead… the UK has to lose EU shackles

 It is time to embark on the three steps that will let global finance flourish in the UK.

Source - Daily Telegraph - 17/04/21

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The UK’s vaccines are not the only victims of the EU’s approach to British successes. The EU is also in the process of using regulation and protectionist policies to control markets and take business from the UK’s global financial services.

The signs are that the EU will continue, in the near future, to drag its feet on co-operating with UK financial firms on equal terms to facilitate equivalence-based access to the EU markets. Given these signals from Brussels, the UK must accelerate reform in developing its legal and regulatory framework.

Up until now the primary concern of UK lawmakers has been about equivalence. The fear was that if UK regulations do not track those in the EU, there would be the risk of a lack of “equivalence” determinations. But now, this worry has become irrelevant, since the EU is clearly unwilling to grant equivalency to the UK in any areas, despite our literally identical inherited laws.

The UK therefore needs to reassess its regulatory framework, based upon what is best for the country, the City and the local and international markets that it serves, as well as other financial services businesses up and down the country. The UK is in a position to shake free of the EU and its instincts of control and codified law-making. The highest regulatory standards should be maintained, but without unnecessary red tape and prescription.

The blanket of EU codified rules should be lifted, allowing the UK to recover its common law system and its principles-based approach to regulation. The UK’s separation of powers affords the oversight of the regulators by Parliament and appeals to the courts, providing the necessary checks and balances to ensure that the regulators operate predictably. The latest moves towards open banking and open finance, which allow customers to switch more easily from one UK provider to another, will also help, by encouraging greater customer choice. But more is needed.

First, there is the question of financial services and products which EU law does not permit EU firms to access in the UK, such as the trading of EU shares or, potentially, Euro derivatives. Here, UK firms should be encouraged to establish parallel products and markets, which UK, international and EU domestic investors will want to access. This can be done for numerous asset classes, including foreign exchange, interest rates and equities using instruments such as non-deliverable forwards, total return swaps and depository receipts.

Experience has shown how such products and markets can thrive offshore when onshore rules are too controlling, and that these markets can even be deeper and more liquid than those which they represent. Financial firms based in the UK or able to operate cross-border into the UK should be allowed to trade in these markets, solely under UK law and regulation, without reference to the EU regime. In doing so, they could benefit from netting and liquidity only available in the UK, as a global financial centre with deep trading interests. Money goes where it begets yet more money.

Second, there are UK financial firms which are timid about exercising their rights to provide services and products to EU customers, as they are legally entitled to do. For example, EU laws on investment services and asset management enshrine the principle of “reverse solicitation”, which allows EU customers to access global capital and reach out from under the blanket of EU law in dealing with UK service providers. France sought to narrow these provisions in 2018, in a “non-paper”, but this move was rejected by the vast majority of other member states.

The disruption from any such narrowing would be very significant, affecting the EU economy by constraining EU business with the US and elsewhere. Various EU bodies have sought to scare off UK businesses from using these rules, by issuing non-binding “opinions” on their scope. Firms need to see these for what they are. Furthermore, the UK Government could help to embolden its firms to rely on these legal rules by itself passing legislation to reassure firms that, within its ambit, it would not seek to enforce any arbitrary decisions of EU regulators on British firms.

Third, the UK can make it easy for EU customers to establish small presences in the UK in order to benefit from global financial services and products under UK law and regulation, and outside the EU’s jurisdiction. A report in January indicated that over 1,000 EU firms are already doing this. Many more could be encouraged to do so.

These are the steps that will let global finance flourish in the UK, building on the fundamentals the UK has uniquely offered for centuries. In modern times, virtual service delivery limits the ability for the EU to impose constraints on business which run against the interests of its firms and citizens. The consumer is increasingly king. It is likely that, over time, EU businesses will expand their use of legitimate techniques to benefit from the UK’s global marketplace, as the allure of the liquidity and superior regulation of the UK’s market exercises its gravitational pull. EU financial firms will then need to follow their customers here to avoid higher costs. With confidence, deploying the magnetic benefits of its business-friendly approach and common law heritage, the UK can expand its position as a global centre for the financial markets.