Eight major reviews, two major consultations, 30 wider probes — that’s what has gone into forming post-Brexit regulation in the UK.
The Earl of Kinnoull appears to have a good portion of that paperwork stacked up in a Millbank office when we meet, and the chair of the European Affairs Committee is ready to answer some questions on the tricky state of the UK-EU financial services relationship.
“People probably don’t realize how impressive this managed divergence effort is,” he says. “It was one size fits 28. Now we’ve got to get to one size fits one.”
Born Charles William Harley Hay, the Earl knows a thing or two about change in the City. A qualified barrister, he spent a quarter of a century at insurance firm Hiscox before becoming a peer in 2015. Now, speaking the week before Prime Minister Boris Johnson’s resignation, the head of the Lord’s committee that is meant to hold the government’s feet to the fire on all things Europe is trying to keep it honest as it undertakes the mammoth task of forging a new rulebook after its EU split.
Some of that work won’t be controversial. MiFID II guidance currently runs to more than a million pages, for example, the Earl says.
Everyone agrees that business wants proportional regulation: “You don’t want tiny businesses having a 2,000-page form to fill in,” and he’s “absolutely certain Solvency II needs a tweak”. But that’s where the easy wins end.
“Doing the theory is one thing. Doing the delivery piece is going to be really difficult,” he says. “You’ve got to fit in with international standards, you must remain a well-regulated center. If you are not well regulated, you won’t be a center.”
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From the future of equivalence with EU rules and a memorandum of understanding between regulators to debates over clearing and political interference, London has an entire range of mountains to climb, and it is still at the foot of some of them.
In a report published on June 23, the Earl’s committee branded the government “reluctant” to engage with the EU on financial services. It noted that the sector barely made it into the UK-EU Trade and Cooperation deal that came into force on 1 January 2021, and that a memorandum on regulatory cooperation remains unsigned despite being finalized in March last year. It also noted that the UK had struck only two equivalence decisions with the EU, both of which were time-limited.
As if the paperwork were not enough to cover the sheer spread of the topic, the Earl gets a big spreadsheet up on his tablet. Each box is color-coded, indicating which jurisdictions have equivalence decisions with the EU in which different areas of financial services. China has something like 14, he points out. Remember: the UK has two. And one has already lapsed.
“We are a neighbor and a liberal democracy, so that does not make much sense,” he says.
While both sides have managed to rumble on without signing the MOU, it “wasn’t created to be a bad idea”. So why the stalling? Unfortunately, the reason the City continues to be frustrated by a lack of regulatory progress boils down to the politics of the split, the ramifications of which continue to play out today.
“I’m spending a very large amount of my time worrying about the Northern Ireland protocol,” the Earl says. “Equivalence is a political decision. The two things are in the political sphere. Therefore it is perfectly clear it is caught up in a political disagreement.”
His message to the government is simple — clear the diplomatic deadlock and financiers might stand a chance of forging better relations with the bloc.
As it stands, London is holding up well since leaving the EU, all things considered. So far, the Earl’s report notes, around 7,000 jobs have moved to the bloc, far fewer than estimates that were as high as 75,000 around the time of the referendum in 2016.
“Eighteen months in, what we saw with the very small movement in jobs was interesting; it was a smaller movement, but it didn’t all go to one place that’s going to be a new center,” he says. “Growing a new center is a problem because different nations would view themselves as the natural choice.”
But the longer the impasse continues, the more pressure London’s crown is likely to come under from the EU. In the world of clearing, for example, the EU granted only a temporary extension to equivalence last November, and has been crystal clear that it wants to see more business move back to the bloc in the medium-term.
“It wouldn’t be normal if they didn’t try to do something,” he notes — even if clearing disparate pools of capital across multiple smaller houses would create complexity for the bloc, it still has a chance to cash in on new business . “There’s a number of natural advantages for London, but that’s not in any way to say London can be complacent. If you wait too long to see the evidence, the damage might already be done.”
Asia is also doing “phenomenally well”, he notes.
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But in the meantime, the City doesn’t need to throw the baby out with the bathwater by trying to reinvent the wheel. That means the political pressure the City is feeling to be a world leader in fresh markets such as cryptocurrency and fintech isn’t necessarily something it needs to bow to immediately.
“There’s a difference between a politician saying something and businesses deciding they want to devote significant time and energy to something,” he says. “The community of things that make up the City, they will all move in a direction towards something if they see there is a client opportunity.
“At the time we were gathering evidence, bitcoin was at $65,000. This time it’s under $20,000. London doesn’t need to rush. London spent a long time in life not being a pioneer.”
Eventually, we’ll settle on a relationship that suits both the UK’s and EU’s interests and strengths better, he says.
“The truth of the matter is Europe is quite good at making things and we are quite good at financing things, broadly speaking.”
20 December 1962
MA, Christ Church, University of Oxford
Called to the Bar (Middle Temple)
Chair, European Affairs Committee
Deputy Speaker, House of Lords
Crossbench peer, House of Lords
To contact the author of this story with feedback or news, email Justin Cash