Brexit: The Future of Financial Regulation and Supervision (European Union Committee Report)

Lord De Mauley Excerpts

Wednesday 6th June 2018 Lords Chamber

[Lord De Mauley (Con)]

My Lords, I am also a member of the sub-committee and I echo the complimentary opening words of my noble friend Lord Lindsay about those who run us and those who help us. It is the responsibility of the regulators and supervisors to regulate and supervise, so that the financial services markets are safe and fair for those who participate in them and, in particular, for those who rely on them. This is a country with a reputation as a safe place for investors and retail banking customers that predates our membership of the EU. Indeed, as the noble Baronesses, Lady Falkner and Lady Liddell, said, our experts have taken a disproportionately large part in designing the EU regulatory and supervisory framework precisely because of their experience and fine reputation.

I think I can safely say that our meetings with the Bank of England and others did more than enough to convince us that our regulators and supervisors are capable of designing and operating systems to maintain the stability of our financial system and investment markets. However, there is an opportunity here, perhaps in the medium to longer term, for systems which are purpose-designed for the United Kingdom. We would benefit from systems which, while keeping our investors and retail bank customers safe, at the same time avoid a bureaucracy that stifles the appropriate risk-taking we need if we are to benefit from new technology, new opportunities and new potential trading partners.

Our report covered a number of important matters, all of great complexity and all of which require a great deal of work and a co-operative attitude on both sides of the channel to achieve them. I acknowledge that the negotiations under way will need both sides to compromise if we are ultimately to agree. I also acknowledge the issues raised in the debate so far by other noble Lords, but I want to focus on where we discovered scope for the United Kingdom to regulate our financial services sector better and more appropriately than the EU currently regulates it. Both the noble Baroness, Lady Falkner, and my noble friend Lord Lindsay referred to this.

Our report provides examples of where EU regulation and supervision, which of necessity has to cater for widely differing markets, fall short. In paragraph 189, for example, we say:

“Some areas of the EU’s current regulatory framework have proved problematic in the UK context. The EU, according to UK Finance, ‘has always faced the challenge of regulating a market with an exceptionally diverse set of financial services businesses’, resulting in compromise solutions on legislation that are not always coherent when applied to domestic markets. Lloyd’s accordingly concluded that ‘the process of arriving at a level playing field can have disadvantages .... Brexit may, therefore, present an opportunity for the UK to amend its regime in order to make it more fit for purpose’”.


In paragraph 39 we say:

“Furthermore, Professor Moloney stated that by virtue of its decision-making process, the EU’s policies may not always be optimal. One benefit of Brexit may be ‘a breakaway from groupthink about financial regulation. The EU is a monolith and it has big structures designed to produce compromise positions. That is not necessarily good for the global financial governance system’”.


Looking at specific areas of business within financial services, I will take investment management first. In paragraph 35 we say:

“TheCityUK criticised asset segregation rules in the Alternative Investment Fund Manager Directive (AIFMD) and Undertakings for Collective Investment in Transferable Securities (UCITS), and the Short Selling Regulation (SSR) on trading practices, as areas where the EU has taken unwelcome action, commenting that ‘the overlap of these pieces of legislation are a central cause of the reduced liquidity in the market but critically are not based on international standards’”.


On insurance, we say in paragraph 194:

“There are areas of the UK regime that have incorporated EU standards in ways that may have been detrimental to the UK’s domestic market … Julian Adams of Prudential told us: ‘There are a number of aspects of Solvency II that not just the industry but the regulator does not think work appropriately’”.


On fintech, an area where the UK has taken an early lead, in paragraph 42 we mention that the regulatory sandbox had,

“demonstrated the FCA’s greater commitment to flexibility and supporting innovation compared to other regulators”.

In paragraph 209 we say:

“The UK’s innovative approaches to FinTech regulation have served as a model for other regulators. In the words of Charlotte Crosswell, the sandbox ‘has been successfully copied across the world’”.


But in paragraph 43 we say:

“While the UK currently possesses a degree of autonomy in FinTech, which it uses to put in place innovative supervisory practices, there is the potential for EU intervention. Karel Lannoo, Chief Executive of the Centre for European Policy Studies, told us that ‘The EU is now working on a regulatory approach to FinTech. Is it needed?’”.


Turning to the mainstream business of banking itself, in paragraph 32 we say:

“Deloitte’s written evidence argued that the EU’s proposals for the CRD ‘demonstrated a growing willingness to depart from implementing global post-crisis banking rules’, in particular by discounting risk weights derived from the fundamental review of the trading book … by 35% for the first three years of application’. The EMIR review is, as we have noted, a matter of concern for the clearing industry”.


In paragraph 38 we point to some of the risks of membership of the EU:

“The Financial Services Consumer Panel made a related point, suggesting that a ‘weakness of the EU regime has been a lack of consistent supervision across Member States. Regulatory expertise and resources across the EU28 vary greatly’, which in turn ‘creates risks for all consumers and undermines trust in the market, especially for passported products’”.


As we say in paragraph 201:

“The second aspect of the UK’s current regime, as derived from EU regulation, that was cited as problematic was the regulatory treatment of smaller firms operating domestically rather than internationally. As the ICAEW”—


the Institute of Chartered Accountants in England and Wales; I declare an interest as a fellow—

“pointed out, this has been especially problematic in the context of prudential standards, as ‘the approach to bank capital is an area where there have been differences between the international and EU approaches’. They explained: ‘The Basel Accord was originally intended for internationally active diversified banks. In the EU (CRD IV, CRR) we have elected to apply the same Basel rules to all banking and investment firms. The US, in contrast, has not. It applies the Basel rules only to its international banks’”.

It is often said, with truth, that one of the benefits of membership of the EU is that we can influence it from within. But in paragraph 46 we say:

“There have, though, been a few failures of UK influence at the EU level. One of the most notorious concerned remuneration rules in CRD IV, which impose a bonus cap for bankers. Deloitte noted that the UK had opposed this measure, on the grounds that it ‘fails to link risk-taking with variable remuneration, increases fixed pay at banks and consequently makes those banks less able to reduce their salary costs in times of stress, potentially contributing to financial stability risks’”.


In paragraph 186, we also say:

“However, proposals to demand the relocation of systemic CCPs within the eurozone will not achieve the Commission’s objectives of bolstering financial stability”.


While no one should be under any illusions that this is going to be easy, it could in the long term also present opportunities for us. I hope my noble friend the Minister will tell us that the Government intend to grasp these opportunities, to the benefit of businesses in the financial services sector and, in particular, to the benefit of their customers.