The European Commission and the UK regulator have called for greater co-operation between the UK and the EU to prevent a possible “cliff edge” that could jeopardise the financial services sector across Europe.
In a speech on Tuesday to the City of London, Valdis Dombrovskis, the European Commission’s vice-president responsible for financial regulation, said “supervisors need to work together” to avoid further disruption to pan-European financial services in the wake of Brexit.
However, he offered a stark warning: “As vice-president in charge of financial stability, my message to all parties – firms and supervisors – is that they need to continue their work to prepare for all scenarios.”
Dombrovskis’ comments echoed concerns raised earlier in the day by Andrew Bailey, CEO of the UK’s Financial Conduct Authority (FCA). Both men warned of the limitations of extending the existing “equivalence” regime, under which non-EU companies can access the single market, to the UK post-Brexit.
Dombrovskis said that while “equivalence [was] not perfect…[it] has proven to be a pragmatic solution”.
Bailey was unequivocal, saying he recognised that equivalence could “increase choice and competition in home markets” – but he added: “The current EU equivalence regime doesn’t best suit any of the parties.”
Under the current system, the EU has more than 200 equivalence decisions across 30 non-EU jurisdictions.
“For example, equivalence decisions in the derivatives and trading space have allowed European banks to service clients across the world and EU investors to access pools of liquidity anywhere in the world,” Bailey noted.
However, the FCA chief said: “Mutual recognition, as [Brian Hayes MEP] suggests, would be the better way to establish the steady-state between the UK and the EU in future.”
Avoiding a ‘no deal’ scenario
Both men raised the spectre of the consequences of a failure to reach a final deal – even with a transition period in place until 31 December 2020.
Dombrovskis said Brexit was already posing many challenges.
“For the financial sector, the Commission’s first priority is to safeguard financial stability and ensure investor protection,” he said. “It is my duty to encourage you to take steps to prepare for all scenarios.”
For Bailey, however, averting a cliff-edge scenario – “which we should all want to avoid” – was paramount. He welcomed the conditional agreement of the transition period.
“This matters in financial services because the risks around contract continuity, data sharing and broader market disruption could jeopardise financial stability, the preservation of which is a shared objective of both sides,” he said.