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Brexit: Expert discusses 'success' for the UK government
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The UK and EU are embroiled in discussions about financial rules and market supervision so that a memorandum of understanding (MoU) agreement is made by the end of March. But a draft document of the MoU has shown Brussels can approve direct market access for foreign financial companies if it believes their home market rules are at the same standard as the EU’s, under a system known as “equivalence.” The UK wants EU equivalence also to be outcomes-based, which would ensure that the focus would be on whether financial rules in Britain and the EU produce the same result.
But Brussels has already warned that an agreed MoU may not automatically lead to more EU access for London’s finance industry.
There is also no mention of outcomes-based equivalence in the draft MoU.
Bank of England boss Andrew Bailey furiously criticised the EU’s plans for being “very controversial”.
He said: “The efficiency really comes from having a very big pool of derivatives that can be netted and cleared down.
“By splitting that pool up, the whole process becomes less efficient, and having the smaller part of the pool is even less efficient.”
Mr Bailey added Brussels was also planning new rules for financial institutions operating in Britain that would leave them with extraterritorial legislation and penalties, potentially forcing them to move to Europe.
He said: “To get that by fiat would require something very controversial such as an attempt at extraterritorial legislation, or an attempt to force or cajole banks and dealers to say there will be some other penalty for you unless you move this clearing activity into the eurozone.
“Quite bluntly, that would be highly controversial and it would be something we would have to and want to resist very firmly.”
Britain’s current deal that recognises the country’s clearing standards as equivalent to the EU will expire in June 2022.
Brussels will then be able to remove equivalence and bring over the business.
This would result in 25 percent of trade moving from London, but bosses in the EU have hinted they could also poach the remaining 75 percent.
It comes as Britain’s financial services industry has been largely cut off from the EU since the Brexit transition period ended on December 31.
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This is because the sector is not covered by the UK-EU trade deal.
Trading in EU shares and derivatives has already left the UK for continental Europe.
At the moment, the EU can also in theory scrap equivalence decisions with just 30 days’ notice.
However, industry officials also said that the draft document could be the first step in rebuilding trust between the EU and UK.
Chris Bates, a financial services lawyer at Clifford Chance, told City AM: “It is important to establish some framework for a regulatory dialogue even if there are low expectations of any movement on new equivalence decisions any time soon.”
But another financial sector source said the draft may not make much difference as Britain is likely to get only limited equivalence.
They said: “The MoU is on the lighter side of what the City wants.”
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