On 27 January 2018, the House of Lords EU Financial Affairs Sub-Committee published its report, Brexit: the future of financial regulation and supervision. On 9 May 2018, the UK Government published its response to the report together with a covering letter from John Glen MP, Economic Secretary to the Treasury. Both the response and the covering letter are dated 26 March 2018.
Points of interest in the report include:
- the final shape of the UK’s future financial regulatory and supervisory framework is dependent on the outcome of negotiations with the EU;
- the UK Government is committed to the full, timely and consistent implementation of agreed international standards. The UK has continued to push this message in fora such as the G20, recognising the need to avoid rolling back on reforms that could lead to a race to the bottom;
- the UK Government believes that the ‘onshoring’ of EU financial services regulation must deliver a UK regulatory framework that is fully functional and flexible enough to respond to changing conditions. It must also ensure accountability to Parliament for those key areas of law that establish the regulatory framework and set policy direction. Following this approach would mean that ‘Level 1’ legislation and ‘Level 2’ Delegated Acts, which have been proposed by the European Commission and negotiated through the EU institutions, would become the responsibility of UK ministers and Parliament. For ‘Level 2’ binding technical standards, the UK Government proposes to transfer responsibility to the UK regulators (the Bank of England, the PRA and the FCA). This responsibility would be consistent with the rule-making responsibility already delegated to UK regulators by Parliament under the Financial Services and Markets Act 2000;
- the UK Government and the Commission both recognise that Brexit has the potential to impact the continuity of service provision. In addition, the UK Government previously announced that it would legislate, if necessary, to ensure that contractual obligations of EEA firms contracting with UK customers would continue to be met. This would apply to in-bound firms only – it is in both the UK’s and EU27’s interests to ensure reciprocal arrangements are in place; and
- it would be very unlikely that the EU location policy under the Commission’s proposed revisions to EMIR would result in the complete relocation of the UK clearing industry to the EU. Instead, it would effectively deny EU firms access to global derivatives markets, increase the cost of clearing and undermine efforts to strengthen financial stability. The UK Government believes that if clearing activity does move, it is most likely to go to the United States.