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19th of January 2018

Economy



UK City regulators turn on Brexit charm offensive

Caroline Binham and Martin Arnold in London

December 20, 2017

UK regulators threw down the gauntlet to their EU counterparts, saying on Wednesday they would keep the UK’s financial system open to foreign institutions after Brexit even as Brussels hardens its stance towards the City of London.

In a move to maintain London’s status as a global financial centre after Britain leaves the EU, the Bank of England said it would allow European-based investment banks that access the City through their branches under an “EU passport” to apply for new regulatory licences much like those enjoyed by their US or Japanese rivals.

But in a thinly veiled challenge to the European Commission, which pushed out its own tough conditions on Wednesday for accessing EU clients, Mark Carney, BoE governor, said the UK’s stance of “responsible openness” hung on a similar response from the EU.

“Our approach is ... best with a high degree of supervisory co-operation,” Mr Carney told Parliament’s Treasury select committee. “We would hope it’s reciprocated. If it’s not, there will be consequences.”

In what appeared to be a co-ordinated charm offensive, the Financial Conduct Authority also announced temporary waivers would be granted to the over 8,000 European entities operating in Britain — including banks, insurers, asset managers and payment firms — to allow them to run as if the UK were still in the EU should Brexit occur without a bilateral agreement on financial services.

Philip Hammond, the chancellor, said the flurry of initiatives “will ensure that the UK’s exit from the EU is smooth and orderly, will underpin the UK’s status as a global financial services sector and will ensure that UK consumers are protected”.

The more easily and efficiently EU banks can operate in the City, the less incentive they have to move business elsewhere. In terms of Brexit negotiations it is a masterstroke

European Commission proposals, also unveiled on Wednesday, that would require UK investment banks to stay close to EU rules, including retaining Brussels’ controversial bonus cap, in order to accessing the bloc.

Several European capitals, particularly Paris and Frankfurt, have actively courted international banks to relocate from London after Brexit. But the BoE’s plan “effectively torpedoes European hopes to create a rival to the City in the EU”, argued Simon Gleeson, a regulatory partner at Clifford Chance.

“The more easily and efficiently EU banks can operate in the City, the less incentive they have to move business elsewhere,” said Mr Gleeson. “In terms of Brexit negotiations, it is a masterstroke.”

Under the BoE’s plans, EU investment banks will be able to continue operating in Britain even if their London operations are only branches of Europe-based headquarters, a “third-country branch status” they will be able to apply for from January.

Banking executives had feared the BoE would force all EU investment banks to create subsidiaries in Britain, a process that requires capital and liquidity to be held in the UK and scrutiny from the Prudential Regulation Authority. Setting up subsidiaries is far more expensive than “branching”, where banks are overseen by their home regulator and can return capital and liquidity to their central Treasuries at will.

However, the PRA reserved the right to force banks that were systemically risky to create subsidiaries. It said any investment bank with a UK balance sheet higher than £15bn could fall into that category. That would include Deutsche Bank of Germany and possibly Société Générale and BNP Paribas of France.

The Treasury promised to legislate to prevent millions of insurance policyholders and £26tn of cross-border derivatives having their contracts voided by Brexit. Mr Carney said the UK could remove uncertainty over insurance on its own, but it needed agreement from the EU to deal with derivatives.

The government also gave the BoE new powers to “recognise” foreign clearing houses. Such recognition is currently granted through the EU, and their post-Brexit regulatory status has been an open question.

The BoE said it expected overseas clearing houses to apply for recognition in the UK if they wanted to provide services to UK trading venues.

The FCA, meanwhile, will be given oversight of credit-rating agencies.

The BoE’s plans do not apply to retail banks. The central bank has previously said EU-based lenders with a material retail presence in the UK will probably have to create a subsidiary. On Wednesday, it defined a material presence as over £100m of transactions each year.

Until now, the PRA had not made clear its position on wholesale banks. But banks will have to start applying for new regulatory licences now, to be ready for when the UK departs in March 2019.

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Catherine McGuinness, policy chairman at the City of London Corporation, described the announcement as “a welcome bit of news to end the year for the City”.

Wednesday’s decision is not expected to affect foreign investment banks from outside the EU, like those from the US and Japan, which currently have their own separate status.

Regulators will still be faced with a torrent of applications: the PRA now expects to receive about 200 new regulatory authorisations to scrutinise. So far over its four-year history, it has averaged about 12 new approvals a year.

The move to grant temporary permissions is also designed to avoid the FCA becoming overwhelmed by thousands of applications for licence approvals by EU-based firms and funds ahead of the UK’s planned exit from the EU on March 2019.

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