Author: Jim Brunsden
Posted on: Financial Times |Tuesday 19th December, 2017


Investment banks in Britain would have to stick closely to EU rules on issues such as bonus caps after Brexit, under proposals the European Commission is set to make on Wednesday.

The commission is planning tougher scrutiny of financial centres outside the EU that offer services to European clients, even as it insists that financial services will not be included in a Brexit trade deal with the UK.

Under such a scenario, the access to the EU market enjoyed by Britain’s financial services industry — home to about half the EU’s 6,000 investment companies — would be determined by whether the commission deems UK rules to be “equivalent” to EU standards, rather than by rights set out in a treaty.

The draft legislation, which will need to be approved by EU states, would introduce a more rigorous and intrusive approach to vetting equivalence for brokerages and investment banks outside the EU — largely because of Brexit.

A draft of the plans, seen by the Financial Times, says that there is a “need to update the regulatory architecture in the EU” to address the “pivotal role played by UK investment firms in this area to date [and] the decision of the UK to withdraw from the Union”.

People briefed on the plans said they would mean that the UK would need to stay in close regulatory harmony with the EU if it was to benefit from the access provisions, not least because the commission has the power to withdraw equivalent status at any time.

Respect for rules on banker pay, notably the EU’s ban on bonuses of more than twice fixed salary, will be one factor that is sure to be taken into account in Brussels’ assessments, the people said.

Michel Barnier, the EU’s top negotiator, also maintains that the alternative route of preserving financial services access for the UK through provisions in a trade deal is not an option.

“There is not a single trade agreement that is open to financial services. It doesn’t exist,” he told The Guardian and other European newspapers.

By contrast, David Davis, Britain’s Brexit negotiator, has called for the future deal to include a strong services component, while The CityUK, the City of London’s principal lobbying group, said on Tuesday that “just because financial services have not been encompassed in free trade agreements to date is no reason to dismiss them from a future UK/EU free trade agreement”.

Some Brexiters, particularly in the City, have long argued that leaving the EU would allow the UK to junk regulations deemed to be holding back the financial centre — particularly the bonus cap, which was bitterly opposed by Britain when it was agreed by governments in 2013. It covers banks as well as other types of investment companies.

Mark Carney, the governor of the Bank of England, also suggested last month that the cap was one of several EU financial rules that could be removed after Brexit.

But Brussels’ stance means the UK is set to become reliant on the EU’s various equivalence provisions, which seek a balance between keeping the EU market open to outside businesses and preventing “regulatory dumping” that could give such groups an advantage against European rivals.

Many banks view the EU’s financial services equivalence regimes as too uncertain and incomplete for them to base their business models on.

There are also big chunks of banking that are not covered by any equivalence agreements, such as corporate lending, mortgages and payments.

Companies based in countries without equivalence have no alternative but to establish a subsidiary within the EU — subject to European licensing and supervision — if they want to market regulated services, such as execution of trading orders and portfolio management, to European clients.

The plans will put into practice proposals outlined by Brussels this year for more rigorous equivalence assessments of “high impact” countries where any lapses in regulation and supervision could “significantly jeopardise financial stability or market integrity in the EU” — criteria that would apply to the UK after Brexit.

But the equivalence plans are only one part of the draft law, which, the commission intends, will also overhaul capital requirements and other prudential regulations for investment companies based within the EU.

Valdis Dombrovskis, the EU commission vice-president responsible for the plans, will say current rules are overly complex and ill-suited to capturing many of the risks that investment groups take.

Brussels will propose that large investment banks should be placed more explicitly under the authority of the European Central Bank, the euro area’s top banking supervisor — a move also intended to better prepare the EU for any post-Brexit relocations from London.

The proposals will also seek to slash red tape for smaller businesses operating in the single market, as part of the EU’s project to develop a seamless capital markets union for cross-border investment.

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