The UK cannot outsource financial regulation to the EU and may have to diverge from the bloc’s rule book in time, a deputy governor of the Bank of England has warned, as he highlighted the need for “good faith” on both sides as Brexit negotiations drill down on the future of financial services.
Jon Cunliffe, who is in charge of ensuring financial stability for the BoE, stressed the importance of the City of London to the EU, adding that the bloc had “more to gain than lose from access to London” and that it was unlikely there would be a wholesale shift of activity from the City to the bloc in the wake of Brexit.
“The UK cannot outsource regulation and supervision of the world’s leading complex financial system to another jurisdiction,” said Sir Jon. “That argues against a relationship built on textual alignment of our regulatory frameworks. Rather, and in line with the way in which global governance has developed, it requires a relationship built on the assessment of similar outcomes, in a non-discriminatory way, paying due respect to home country regimes in line with [internationally agreed] norms.”
He added: “Future regulatory and supervisory arrangements between the EU and the UK need to be stable and built on good faith. This is not primarily because cross border activity beneficial to both sides will not be maintained in an unstable environment — true though that is. It is because abrupt disruption of cross border activity in the financial sector is in itself a source of risk.”
The speech made by Sir Jon on Tuesday to a Berlin audience came as the first shots were fired between UK and EU over the future of financial services since the UK officially left the bloc nearly two weeks ago.
Sajid Javid, the chancellor, has said the UK will push “permanent equivalence” as a way of retaining access to the single market that will last for “decades to come”. Hours later, Michel Barnier, the EU’s chief Brexit negotiator, said a permanent deal would not be granted and the “UK should not kid themselves”.
Equivalence already exists and is a way of countries such as the US and Singapore accessing the EU. But it only exists for certain areas within financial services, and can be revoked at any time.
City companies have taken steps to mitigate the uncertainty thrown up over what the UK’s future relationship will be with the EU by setting up local subsidiaries in the bloc, overseen by local regulators. EU groups have done likewise in the UK.
The BoE has long argued that it should not be a “rule-taker” from Brussels after Brexit, although some in the City see alignment with EU rules as a price worth paying if it ensures market access.
“It is conceivable that the global markets in London will transfer to EU jurisdictions. But I suspect that will not be likely,” said Sir Jon on Tuesday. “The EU has the ambition to build a more integrated and more market-based financial system.”
Sir Jon said: But “one cannot regulate deep capital markets into being, and certainly not global ones”.
He added: “As new challenges emerge, as EU regulation no longer needs to cater for the greater complexity and scope of risk and activity in London, and as the complex processes and structures needed to manage the regulatory framework within the EU are no longer needed in the UK, there may well be divergence.”
