Speech Chris Buijink – Financial services post-Brexit, delivered at digital roundtable NBCC 23 June 2020
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The departure of the UK from the EU poses a major challenge for financial services as it requires us to adapt to new circumstances. The COVID-19 crisis means that we are no longer negotiating the future EU-UK relation under good economic weather and that also the circumstances for the financial sector have changed. I have always argued for a Smart Brexit, rather than a Hard Brexit. Although Brexit seems to turn out harder than many had hoped for, we need to take the long view and see how we can make the best of it. It is our duty to be optimistic.
This optimism for me is embodied by the Dutch long distance swimmer Maarten van der Weijden, who in 2017 swam up and down the thirty kilometres wide Channel. The strong currents and wind in the Channel meant that swimming was not a straight forward affair and he had to swim twenty additional kilometres each way to eventually arrive. Defining a new relationship with the UK is a bit like crossing the channel swimming. It takes some additional distance, but eventually we will get there.
The future relationship with the UK is very important for the Netherlands. Already for centuries we have a very substantial trading relationship. Also, in terms of financial services we expect the City of London to continue to play an important role. All larger Dutch banks have presence in London and also many UK headquartered banks are active in the Netherlands. In time there might be EU trading hubs coming up alongside it, but the relationship with the UK will remain an important one.
A consequence of Brexit is that markets will become more fragmented. Markets are very flexible, they are always moving toward where they find the best conditions, the most partners to trade, the most liquidity. Markets are almost by nature international, moving across borders to find the best conditions. This flexibility does not mean that fragmentation is without consequences, there will be more limitations and regulatory hurdles that are costly and will not benefit the end-consumer.
It is clear that EU capital markets need to further harmonise and in many cases need to replace fragmented national regimes with a single European rulebook to provide the scale and certainty needed. Creating European Capital markets, is a natural complement to the Economic and Monetary Union and could contribute to the economic recovery following the Corona crisis. It is very encouraging to see the high quality advice by Thomas Wieser on Capital Markets Union, which provides a clear roadmap for the European Commission.
Recent statements on the state of negotiations between the EU and the UK are slightly more positive, also here we need to keep the long term perspective in mind. Despite all the political limitations, we are striving towards close cooperation and an ambitious relationship.
Equivalence decisions will be the most important instrument to facilitate the future EU-UK cooperation. Equivalence is when the European Commission determines UK rules as having a similar effect as EU rules. Also, vice versa such decision should be taken. The Commission has been very careful in stating where it wants to take such decisions. While, to date we have perfect equivalence with the UK given that rules are 100% aligned, we understand that the political context and negotiation dynamics are such that there is a limited level of comfort and trust. This seems to be the main limitation to get to a more ambitious equivalence regime from the EU side. From the UK side we still don’t know how they will approach equivalence.
Trust between the EU and the UK is key. The UK government has not exactly used the opportunities available to increase this trust over the past years. Looking forward it is essential to work on this. Continued close cooperation between our industries and businesses can help to bridge the divide. This type of exchanges can help take away misunderstanding that seem to sometimes hamper the negotiations. That is also why a Netherlands British Chamber of Commerce has an important role to play.
However, even if we manage to establish a sufficient level of trust for an ambitious equivalence regime, the future relation will always be more limited than the Single Rule Book that we have today. There are around 40 different equivalence decisions, which in total cannot replace the thousands of pages of financial regulations that now facilitate cross-border financial services between the EU and UK. At 31 December 2020 midnight a cliff-edge will occur, however it will hopefully be managed by a comprehensive trade agreement, an ambitious number of equivalence decisions and good supervisory cooperation.
While, the immediate future now dominates the political agenda, we have to look beyond 31 December, just 191 days away. There are three elements that from my perspective will be important 1) international cooperation 2) a level playing field 3) a common agenda.
International regulatory bodies, such as the FSB, Basel, IOSCO and FATF will become more important to provide common standards for the EU and UK. Also, in the present COVID 19 crisis, these bodies have shown that they will continue to provide important guidance. In addition, close cooperation between EU and UK supervisory and regulatory authorities remains essential in order to exchange information and to have a common understanding of market developments. Only with continued cooperation and exchange comes a sufficient level of trust.
Secondly, there will be competition between the EU and UK, which is a good thing for our clients, as long as there is a fair level playing field in financial services. The term level playing field is a bit loaded in the current negotiations mainly in relation to files not directly related to financial services. However, it will be an important consideration in the equivalence assessment. If there is more certainty on a level playing field there can also be more ambitious equivalence decisions. This in the end would lead, to less fragmentation and enhance competition that ultimately benefits the end consumer.
Thirdly, we have a lot in common between the EU and the UK, and while both the EU and UK want to have regulatory autonomy, I see room for an ambitious common agenda. On both sides there is a strong commitment to fight climate change and to find ways to contribute to a more sustainable society. Financial crime and cyber security are also areas where we work closely together. These are just a few elements that can provide a basis for an ambitious common agenda.
Like the long-distance swimmer crossing the Channel, we will meet with wind and strong currents taking us off course. However, we need to maintain our focus, sometimes regulate our breathing and know that land is within reach.