In 2022, the UK government, through its Prime Minister Boris Johnson, revealed its clear intention to progressively free itself from the European legislative framework in financial matters, by proposing a new set of more flexible measures. What are the prospects for the UK and the EU?
This announcement comes at a paradoxical time, because although the financial sector accounts for more than 10% of UK tax revenue and more than one million employees, it is the one that has been left out of the trade and cooperation agreement negotiated between the European Union (EU) and the UK. Moreover, the Memorandum of Understanding on financial services, concluded in March 2021 between the two parties, provides little more information than a framework agreement - neither formally ratified nor entered into force - and some equivalence measures1.
This "no deal" for the financial sector therefore gives the UK room for manoeuvre to adapt, relax or even abolish a certain number of European standards weighing on financial players across the Channel: advantages or constraints?
ADAPTABILITY AND FLEXIBILITY, THE TWO WATCHWORDS OF THE UK PUBLIC AUTHORITIES
For the UK, the conclusion is clear, as Pat Sharman - Country Managing Director of CACEIS UK - explains: "Faced with European regulations, national legislation could provide more flexibility for the UK financial services sector. In a nutshell, I think it’s a very careful balance. Although the focus must be on maintaining the competitiveness of our financial services sector post Brexit, I believe an element of standardisation remains key. This will become more apparent as the focus on ESG and climate risk increases.”
The UK Government, in its drive to adapt financial regulation, has taken steps that have practical implications for the financial sector.
Decisions have already been taken such as the removal of a number of regulatory reporting requirements - RTS 27 and RTS 28 under MiFID II - on 1 December 2021. This demonstrates the UK's desire to distinguish itself from European standards. Pat Sharman confirms: "It’s likely that the UK will continue down this path in order to give a significant competitive advantage to companies setting up in the UK. However, decoupling from EU regulation needs to be thought through carefully because good access to European markets still remains paramount for UK-based asset managers".
The desire to relax certain regulations in order to speed up their implementation undoubtedly gives the UK a head start on the European decision-making apparatus.
Thus, the ambition to be "the world leader in green finance" expressed by Boris Johnson and repeated by the Chancellor of the Exchequer Rishi Sunak in front of the Parliament and the leaders of the banking industry in terms of ESG policy, could constitute a prime opportunity. Given the complexity of EU legislation and the relative slowness of implementing EU-wide standards, the City could succeed in positioning itself as a global leader. "If, for example, the UK decides to support the work of the ISSB (International Sustainability Standards Board) in order to impose an Anglo-Saxon standard for ESG, this could hinder the emergence of a demanding European standard drawn up today by the EFRAG (European Financial Reporting Advisory Group)" says Eliane Méziani, Senior Advisor for Public Affairs at CACEIS.
TOTAL EMANCIPATION FROM EUROPEAN REGULATION IS A CHALLENGE
While moving away from EU regulation may make the UK financial sector more agile and competitive, it may also lead to regulatory asynchrony, which would be detrimental to the UK.
In digital assets
In the field of crypto-currencies or digital assets, which is a vast and complex market to understand in its entirety, "the EU could be a force to be reckoned with", says Eliane Méziani. Going it alone in this area, while the UK has been lagging behind European and particularly French regulations, could be a risky bet. "The market is difficult to regulate by a single state. It is likely that the British will try to follow in the footsteps of the Commission, as seems to be emerging from the speech of the British Secretary of State for the Treasury, John Glen, and to move towards a form of equivalence with European laws (in particular by setting up public consultations, sandboxes, etc.)," comments Eliane Méziani.
In terms of personal data protection (GDPR)
The General Data Protection Regulation (GDPR), which sets out the extra-territorial standards that govern the world's largest data market, is a particularly sensitive issue. It would be perilous for the British government to lose its equivalence with its former European partners, as the United States is now experiencing since the invalidation of the “Privacy Shield” in 2020 and the “safe harbor” in 2015. The American government is also negotiating at a good pace on future equivalences. It should be remembered that the European market represented more than 440 billion dollars in 2020.
In the second half of 2021, the City conducted a relevant consultation to assess the whole of the GDPR. "An exercise that we should perhaps draw inspiration from," comments Eliane Méziani, on the observation of the limits of the GDPR in view of its incompatibility with other European directives”. For example, the problem of the GDPR constraints that weigh on a banking institution when it has to respond to a request for identification of shareholders within the framework of the Shareholders Directive (SRD2) or the issue of articulation with the future regulation on artificial intelligence, which is likely to use personal data.
Implementation of the PRIIPs Regulation
The simplification process sought by the United Kingdom for UK producers and distributors - which initially consists of an extension of the UCITS exemption until 31 December 2026 - raises questions as to the validity of this hypothetical progress. British financial players will have to maintain two production channels if they are faced with European investors, which will be a source of additional human and technical costs.
The forthcoming review of PRIIPs in Europe should be watched closely to compare the differences with the UK KIDs.
Settlement discipline under CSDR
The postponement of the "buy-in "2 issue is being followed closely across the Channel. Indeed, the refusal to implement settlement discipline for CSDR is likely to have an impact on European regulation or leave it in doubt. The European revision of this text is still to come and the Commission has not yet published its proposal. It could mark the return of the buy-in regime or bury it.
Will we see a real divergence of the UK government's next decisions from European financial regulation? Probably, time will soon tell. Whatever regulatory advances are made by either side, the markets will remain connected and interdependent and will have to comply with them.