EU-UK stand-off over financial services rules increases uncertainty

The prospect of UK clearing houses losing direct access to the EU moved ominously closer following a bullish statement by the Chancellor of the Exchequer, Rishi Sunak.

Speaking to the House of Commons last week, Sunak said he was no longer waiting for Brussels to decide on access to its financial markets after Brexit and castigated the EU for holding out on a deal.

“Where others might wish to use equivalence as a political weapon, that won’t be our approach,” Sunak told MPs as he outlined a plan to offer access to the UK under an equivalence-style regime to a wide range EU financial services firms. While this gives some certainty for credit rating agencies, derivatives transactions, financial benchmarks and short-selling originating in the EU, it potentially increases uncertainty for UK firms trading into the EU.

The European Commission has said it is waiting for more information from Britain about its intentions to change financial rules before making its own equivalence decisions. This follows a submission by the UK to the EU in June outlining its plans which flagged up some areas where the UK could be looking to develop new rules. This included the possibility of variation from the Solvency II regime and a change in approach to regulating fund management groups. Proposed UK rules would focus more on the potential for harm to clients than on the risk to groups and would reduce regulatory costs, according to the Financial Conduct Authority. 

The EU only grants access to its markets if the rules for foreign financial firms in their home country are deemed to be equivalent or as robust as regulation in the bloc.

The EU has already said it will allow UK clearing houses to access for just 18 months from January, potentially forcing banks and insurers to use new hubs in the EU from the middle of 2022.

“We are starting a new chapter in the history of financial services and renewing the UK’s position as the world’s pre-eminent financial centre,” said the Chancellor.

“By taking as many equivalence decisions as we can in the absence of clarity from the EU, we’re doing what’s right for the UK and providing firms with certainty and stability.”

“Our approach here is simple: we will use equivalence when it is in the UK’s economic interests to do so taking a technical, outcomes-based approach that prioritises stability, openness, and transparency”, said the Chancellor.

Sunak also set out other measures that will be included in the new Financial Services Bill, including a new taskforce to propose reforms to rules for companies that list in London, in a bid to compete with rival centres like New York in attracting tech firms. Critics have warned that this could be the start of a race to the bottom in terms of listings rules.