UK-EU Revive Financial Services Regulatory Partnership

In light of the UK’s pursuit of regulatory initiatives that diverge from the EU, this column explores the challenges that Brexit presents to EU policymakers. As the largest financial center in Europe now operates outside the EU’s regulatory framework, the authors examine potential threats to financial stability. 

Anticipating significant regulatory differences between the UK and the EU in the medium to long term, the authors also evaluate the EU’s equivalence policy and propose strategies for enhancing future regulatory collaboration.

It’s almost certain that regulatory divergence between the UK and EU will occur. Even if the UK merely refrains from aligning with EU regulatory updates or adopting new EU financial and banking regulations (passive divergence), there is a high likelihood of deviation. 

Notably, active divergence may also be in play, wherein the UK makes deliberate changes to inherited EU rules, as influenced by the Financial Services and Markets Act (FSMA) 2023 and the newly assigned mandates to UK regulators, in place of legislative directives

Initiating a Fresh Era of Financial Sector Collaboration?

In a significant development on June 27, 2023, the UK and the EU formalized a Memorandum of Understanding (MoU), creating a structured foundation for regulatory cooperation in the financial services domain. 

This agreement, referred to as the Windsor Framework, marks a pivotal progression stemming from the earlier Protocol on Ireland/Northern Ireland signed in February 2023. Notably, it has paved the way for enhanced cooperation between the UK and the EU, encompassing various domains, including financial services and the UK’s participation in Union programs

In the wake of the MoU’s endorsement, a collaborative EU-UK financial regulatory forum is set to materialize, convening for the first time this autumn. The forum’s agenda will encompass discussions on regulatory modifications and shared concerns. 

It will be spanning areas such as market dynamics, financial stability challenges, and fortifying EU-UK cooperation in preparation for international forums like the Federation of Small Businesses (FSB) and the Basel Committee on Banking Supervision (BCBS). This MoU effectively puts into action the collaborative declaration annexed to the 2020 Trade and Cooperation Agreement (TCA).

Empowering Growth and Global Competitiveness: The Evolving Regulatory Strategy in the UK

In our report presented to the European Parliament’s ECON Committee, we provide an overview and analysis of the most current developments in legislative and regulatory measures within the UK’s financial sector. 

We delve into the growing disparities between the EU and the UK and evaluate the potential risks these divergences present to financial stability within the EU, as detailed by Petit and Beck in their 2023 report. Importantly, our assessment scrutinizes the EU’s approach and strategy regarding equivalence in their dealings with the UK.

 Furthermore, we explore strategies and alternatives aimed at strengthening regulatory collaboration while upholding the pillars of financial stability, market integrity, and competitiveness.

Transitioning from TCA to Windsor: Advancing Financial Sector Collaboration

While the Trade and Cooperation Agreement (TCA) is comprehensive in scope, its coverage of the financial sector is relatively limited, encompassing only eight out of 783 articles that directly pertain to this domain. 

A deeper level of cooperation within the financial sector was delayed until earlier this year due to the impasse surrounding the Northern Ireland/Ireland Protocol. The resolution of this standoff through the Windsor Framework has now opened the door to enhanced cooperation and the establishment of mutual trust. 

This progress culminated in the signing of the Memorandum of Understanding (MoU) on financial services regulatory cooperation by the EU and the UK on June 27, 2023

Read More: The Regulatory Landscape of CBD in Europe

The UK’s Aspiration to Emerge as a Fintech and Crypto Asset Global Hub

The United Kingdom is actively pursuing its vision to establish itself as a worldwide hub for fintech and crypto assets. This ambition is underpinned by a series of regulatory and supervisory endeavors, including the successful implementation of a financial market infrastructure sandbox. 

The creation of a dedicated FinTech hub within the Bank of England, and a commitment to promoting the development and utilization of stablecoins. 

In stark contrast, the European Union has adopted a distinct approach, which is poised to result in active divergence. The EU is preparing for comprehensive regulation of crypto assets through the Markets in Crypto Assets (MiCA) framework, set to come into effect in 2024, with an outlook for further tightening of regulatory measures