EU AND UK NEGOTIATING POSITIONS ON FINANCIAL SERVICES
Directives for the negotiation of a new partnership with the United Kingdom of Great Britain and Northern Ireland Council of the European Union 5870/20 (46pp) 25 February 2020
The future relationship with the EU : UK’s approach to negotiations HMG CP211 (36pp) 27 February 2020
Formal negotiations on a ‘deal’ start on 2 March 2020 (today).
Last week both the EU and the UK published their respective negotiating positions with respective to the ‘new partnership’ (EU) and ‘future relationship’ (UK) in two mercifully short documents.
The purpose of this article is to give a succinct account of both documents key points as they relate to financial services and the parties’ attitude to negotiating a ‘deal’.
Some preliminary points:
For the most part both documents are bland and consist of meaningless platitudes in sharp contrast to the strident public positions taken by both parties in the media.
Very little is said about financial services.
The EU have three paragraphs on ‘cooperation on financial services’ and one on ‘anti-money laundering and counter-terrorism financing’ in a document of 172 paragraphs.
The UK have three paragraphs on ‘financial services’ and one on ‘equivalence in financial services’ in a document of 64 paragraphs. There is no mention of AML/CTF issues.
Overall, the drafting of the documents reflects the difference in the civil law (EU) and common law (UK) approaches.
Cooperation on financial services (at p15)
The partnership should consider financial market infrastructure (FMI) issues as well as consumer and investor protection.
Equivalence frameworks will be unilateral so preserving EU ‘regulatory and supervisory autonomy’.
There are some reasonably bland assertions that there should be an allowance for an ‘informal exchange of information and bilateral discussions’.
The message is that the EU are not interested in trading supervisory and substantive issues around equivalence decision making between the EU and the UK.
Anti-money laundering and counter-terrorism financing(at p37)
The EU envisage compliance with FATF standards going beyond them in relation to public registers of beneficial ownership for companies and semi-public registers for trusts.
Financial services (at p13)
The UK clearly echoes the EU commitment to FMI issues as well as investor and consumer protection.
The UK will seek (in line with the Canada CETA) legally binding obligations in relation to market access and competition.
The UK further cites the EU-Japan EPA as the model for establishing regulatory cooperation arrangements.
Equivalence in financial services (at p30)
The UK acknowledges that the unilateral equivalence assessment exercise is distinct from the CFTA. The UK claims that this position is agreed with the EU.
However, the UK makes its position on this quite clear:
‘The fact that the UK leaves the EU with the same rules provides a strong basis for concluding comprehensive equivalence assessments before the end of June 2020.’
Financial market infrastructure
Both the EU and the UK are committed to the preservation of the FMI.
This takes the view that access to the FMI and the equivalence decisions are (in the final analysis) unlikely to be traded for fishing rights in UK territorial waters.
There is too much at stake. Initiatives over these issues is a matter for BIS structures (principally the FSB) and are not within the exclusive purview of either the EU or the UK. The current temporary equivalence decisions made by the EU and the UK point the way on this. All three UK CCPs (until 31 January 2021) and the CSD (31 March 2021) have temporary equivalence decisions from the EU.
The ECB has stated it wants to move euro-derivative clearing to the EU-27 in the face of LCH SwapClear currently clearing 98.3 per cent. of euro interest swaps.
Registers of beneficial ownership
The EU want to go beyond FATF recommendations on registers of beneficial ownership.
However, this is against the background of widespread late transposition of the fourth money laundering directive in the EU.
France transposed the fifth money laundering directive late.
The European Commission has taken initial action against eight Member States for failing to transpose the fifth money laundering directive.
EU regulatory and supervisory autonomy
This is emphasised a few times in the EU negotiation document which could be ominous particularly as both parties state that equivalence decisions will be unilateral. The question is how this might work against the EU convergence policy.
Role of the European Supervisory Authorities (ESAs)
All three ESAs had their ‘charters’ revised extensively with effect from 1 January 2020 and each has responsibility to contribute to the making of equivalence decisions.
This raises the question of the UK becoming a ‘rule taker’ which appears anathema to the UK.
In particular, the European Banking Authority (EBA) has new wide-ranging and over-arching responsibilities to take the lead role in the AML/CTF sphere.
Neither the European Insurance and Occupation Pensions (EIOPA) nor the European Securities and Markets Authority (ESMA) have corresponding responsibilities in this sphere.
The consistently stated policy objective in the EBA ‘charter’ is for supervisory convergence again raising the question of the UK becoming a ‘rule taker’.
Last month the EBA published its AML/CTF factsheet (11pp) which indicates it takes a broad view of its responsibilities and intends to be proactive.
In these circumstances potential difficulties will arise reconciling unilateral equivalence decisions with the policy goal of convergence and the new role of the EBA.
Internal EU documents look for equivalence decisions to be made by 30 June 2020 and the UK has the same ambition.
By Tom Griffiths, Associate Director at Lysis Group