Regulation Matters – December 2017

Borders, breakups and failed Brexpectations – Brexit festivities fester on.

With Brexit braced to hit the buffers of the Irish Border, FinTech innovation in sinking sand, Rolet vowing never to return and Farage once more open to persuasion, we look at the make or break issues and the subtler undercurrents around the regulatory landscape.  You can also catch up on previous editions of this fortnightly series here.

L’addition, s’il vous plait: the Bill, the People – and the Irish Border

Well that’s a relief. European Council President says sufficient progress can be made in the next round of Brexit talks.

Unfortunately, that was before we hit the next set of Irish border buffers. For the EU, progress can only be achieved if the UK government is successful on the Bill and the bill, the people and the border.

  • With the Brexit bill agreed, PM Theresa May is reportedly prepared to increase the UK’s €50bn offer if the EU agrees to move on to talks about a future trade deal. But talk is cheap. Upping the offer to talk with no guarantee of an actual trade deal is unlikely to be well received by UK voters.  And of course regulations made over the past 40 years while the UK was a member of the EU will continue to apply after Brexit. In fact Sarah Healey, Director General of DExEU, has said the Government will need an additional 800- 1000 statutory instruments to transfer EU law onto the new UK statute book.
  • Meanwhile, the European Parliament’s Brexit coordinator, Guy Verhofstadt has expressed concerns that the people issue – AKA citizens’ rights – is not being well managed. A report by the House of Commons’ Brexit Committee has called on the Government to request, and the EU to agree, that any agreement reached on citizens’ rights should be ring-fenced when reached, and preserved even if no overall Article 50 deal is reached.
  • As if that wasn’t enough, the UK government must honour its commitment to the EU that there will be no hard border dividing Northern Ireland from the Republic of Ireland once the 310-mile line becomes the UK’s new EU frontier.  It looks like luck is running out right now for Mrs May as pleasing Dublin without alienating Democratic Unionist Party (DUP), which props up her government, remains a key obstacle.  Leo Varadkar, leader of Ireland’s Fine Gael will have the final say: if he is not satisfied with the UK’s offer on the Irish border, it won’t be the ongoing name-calling between Barnier, Davis and Boris which derails the entire process.

Treasury Committee Needles Away at the Glass Ceiling

Mind the gap? Yes, quite a bit. That was our take on this summer’s BBC gender pay gap battle. Disparities in pay for individuals performing the same role seem to be ok for the BBC. Director General Tony Hall did say he would take a look into it, not ‘overnight’ but by 2020 – although ‘now’ might have been more appropriate. After all, the UK elected its first female PM 38 years ago and now even has its first female leader of the Treasury Select Committee, Nicky Morgan.

  • We called on the former UK Minister for Women and Equalities to do better than the BBC – and now she has.
  • A pair of initiatives have now been launched to investigate diversity in the sector and the progress government-backed initiatives have made to place people from different backgrounds into senior levels in private and public institutions.
  • Morgan recently said “it is extraordinary in 2017 that we are still breaking glass ceilings. She has urged the City to “keep needling away at government” to ensure a diverse financial services sector.

Sinking Sand for FinTech

Eighteen entrants – including our colleague Greg Soulsby – entered the ‘regulatory sandbox’ as part of the Financial Conduct Authority (FCA) 2016 Project Innovate initiative to open doors for entrepreneurs who have fresh ideas about how to deliver financial services. It was aimed at creating a ‘safe space’ in which business can test innovative products and services, business models and delivery mechanisms in a live environment while ensuring that consumers are appropriately protected.

But just a year on, some are wondering if it is quickly becoming the sinking kind of sand, as the weight of the regulatory burden, concerns around cyber security, intellectual property rights and procurement, hinder development.

Lack of guidance from the FCA is preventing firms from getting the necessary traction in the market. Even US CFTC Chair Christopher Giancarlo has stated that regulators are failing to keep up with changes driven by financial-technology innovation. He added that if regulators do not put more effort into understanding new technology they could lose their ability to safeguard markets.

The European Commission is set to draw up a comprehensive, innovation-friendly fintech action plan to create a favourable environment for hubs and firms to scale up, with cyber security at its heart by Q1 2018.

Rolet’s Return – probably not, under any circumstances

The City has lost one its most revered chiefs with Xavier Rolet standing down from LSEG. His departure comes after a not-so-private spat between with the company’s chairman Donald Brydon and Sir Chris Hohn, the activist investor who runs hedge fund and LSE shareholder TCI Fund Management.

  • Rolet said that he would not be returning to the board or the job “under any circumstances” and was leaving amid “a great deal of unwelcome publicity”. 
  • Doubling the blow, Rolet was one of the clearing sector’s most vocal on the euro-denominated derivatives clearing row. His exit leaves it all to chance.

One of many Brexit non-sequiturs is the idea that London’s €800tn a day euro-denominated clearing business will move to the Eurozone after Brexit. Even after the European Market Infrastructure Regulation II (EMIR II), in its current form, failed to amount to a strict mandate, the debate continues.

Rolet said of the EU “the rhetoric at times tends to perhaps exceed reality on the ground … That has definitely been the case in the last few months…”

Responding to the idea that business is being driven away as result of Brexit he had not seen volumes move from LCH to Eurex and was not worried by the Eurex plan, which he said mimics an offering at LCH. “Imitation is the best form of flattery. We are being imitated and we welcome the renewed focus on customers. Customer partnership is our model and it has worked well”.

Fragmentation will not preserve the integrity of the markets nor will it promote financial stability. In fact, it’s even one of LSEG’s core values – Integrity and Partnership. Let’s hope that integrity will be upheld and a partnership with the EU achieved, under the new leadership of LSEG. 

Family affair for supervisory authorities

The Council of the EU has voted to relocate the European Banking Authority (EBA) from its current London home to Paris, following Brexit. This could be quite the family affair as Paris is already home to sister supervisory agency, the European Securities and Markets Authority (ESMA). Rumour has it that the two will become one super supervisory agency.

ESMA Chief Steven Maijoor said the impact of Brexit on the organisation will be of focus in the 2018 work programme, as well as communication with institutional and market stakeholders.

ECB managing Brex-pectations

In a no doubt unintended Dickensian twist, it appears that banks’ Brexit preparations are not meeting the European Central Bank’s (ECB) great expectations.

Dual-hatting (where employees carry out functions in more than one entity), empty shells or letterbox banks plans do not go down well with the EU banking supervisor. Several elements in some banks’ plans are falling short of the supervisor’s capital, liquidity, and funding requirements. Local trading capabilities as well as local infrastructure, staff and risk management functions are just the minimum and will need to be in place from day one.

OK. So what about the good news? Well Nigel Farage has vowed to return to UK politics if Brexit stalls…

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