The UK and EU risk market fragmentation and financial instability if they can’t agree a deal on market access once the UK has left the bloc, a Lords EU Committee warns.
The House of Lords EU Financial Affairs Sub-Committee says the Government must urgently clarify what outcome it wants from phase two of EU negotiations and on transitional arrangements, or firms will be forced to activate costly and potentially irreversible contingency plans.
In its report called Brexit: the future of financial regulation and supervision, Baroness Falkner of Margravine, Chair of the EU Financial Affairs Sub-Committee, says: “There is a risk of market fragmentation and financial instability if the UK loses access to the EU, as well as harm to customers and businesses. The UK’s financial services sector is a global asset and both sides should want it to continue serving clients throughout Europe.
“The financial services sector needs greater clarity from the Government about what it wants after Brexit, and it needs it now. A transition period is meaningless without a destination.
“Brexit is an opportunity to tailor the regulatory regime to strengthen the UK’s financial services sector, but the UK must remain committed to the international standards put in place following the financial crisis and continue to shape them to ensure a robust regulatory regime,” she adds.
In the report, the Committee says international standards and EU law has shaped the UK’s regulation of financial services. It added: “The UK heavily influenced those standards and laws. While leaving the EU will allow the UK to tailor its regulation to domestic needs, this will constrained by its commitment to international standards.”
The report adds that the UK must devote sufficient resources to engaging with international standards-setters. It must continue to adhere to international standards and find a way to shape them in future, especially if there is a risk of them being undermined by other states. The EU complies with those standards, so it may be vital in preventing gaps from arising between the UK and EU regimes in future.
Post-crisis reforms have promoted financial stability and the Government should continue to advocate these reforms, is another of the observations in the report. It said that this is especially the case if faced with initiatives by the EU that would lead to market fragmentation and a rowing back on the post-crisis commitments, such as current proposals on potential central counterparty (CCP) relocation. The Government should itself resist the temptation to implement policies that would come at the cost of financial stability, the report notes.
A crucial element of the EU (Withdrawal) Bill process will lie in the resolution of ‘inoperables’: for example, ensuring the continuity of contracts that will need to be serviced beyond Brexit, the Lords Committee said. Translating the acquis will also require dealing with the agreements the EU has with third countries. The UK will need to decide how to incorporate these agreements, the report adds.
The translation of EU regulation into domestic law will need delicate handling by the Government, the report recommends. In future some rules will need to be enshrined in statute, which could be effected using powers contained in the European Union (Withdrawal) Bill. However, it may be more appropriate in some areas for regulators to issue guidance and set standards.
The Government should develop a comprehensive architecture for the future domestic regulation of financial services, the report suggests. Any future regulatory regime will likely result in a significant increase in the powers of domestic regulators to determine rules and provide non-statutory, but binding, guidance. It is vital that Brexit, in transferring powers to domestic regulators, should not result in an unintended deficit in democratic scrutiny and accountability, says the report.
“The UK is a world-leader in the field of FinTech. One reason for this is its pioneering approach to regulation of the sector, which it should continue to support. Moves by the EU to legislate in this field should be resisted by the Government if such initiatives threaten the UK’s flexible and adaptive approach”, the report adds.