The governor of the Bank of England has said the UK should avoid becoming a financial services “rule taker” from the EU at all costs, even if it meals failing to strike a deal covering the sector.
Andrew Bailey told MPs that following EU rules on financial services indefinitely would be too high a price to pay for access to the single market and free flow of trade for financial services.
“If the price of this is too high, we can’t just go for it,” the Bank of England governor said during a Wednesday afternoon appearance in front of the Treasury Select Committee.
“I would strongly recommend that we don’t become a rule taker. I think that is a very bad place to end up in. If the price of that is no equivalence, then I’m afraid that will follow.”
The EU and UK struck an 11th-hour free trade agreement on Christmas Eve to avert a no deal Brexit when the transition period ended on 1 January. However, financial services were not covered by the agreement.
The EU has granted the UK temporary waivers in two areas — clearing and securities settlement. Both sides have agreed to try and reach a separate, fuller agreement covering financial services by March. Bailey said he thought this was a realistic timescale for negotiations.
UK negotiators are seeking to secure “equivalence” rights for Britain’s financial services sector. This entails formal recognition from the EU that UK laws governing the sector are at the same standard as the EU’s. It would mean finance firms could continue to sell services to the bloc uninhibited, although the EU would retain the right to withdraw equivalence rights at any point.
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The EU has asked the UK to provide more information on its plans for future regulation of finance. Bailey said this was “quite problematic”.
“What’s the motivation here? I can think of only one that is sensible,” he said.
“The first motivation would be that the EU thinks the rules should never change — that’s obviously mad.
“Secondly, they think that our rules should only change when their rules change. That would obviously be rule taking.
“The third one, which is the sensible one, is that both of us will change our rules when it’s sensible to do so, we’re both transparent about it, but obviously we’d be transparent at the time and we’ll be transparent to everybody.”
Bailey pointed out that both the UK and EU were bound by international standards bodies governing finance, such as the Basel Committee on Banking Supervision. He said organisations like this form the basis of country-level regulation without any “regional overlay”.
Agreeing equivalence would be preferable, Bailey said, but he qualified: “I don’t start by saying we’ve got to get it, I don’t start by saying it’s the be all and end all.”
Sam Woods, deputy director of the Bank of England and head of the Prudential Regulation Authority, told MPs that regulators across the continent had already made progress aligning at a lower level. Woods said 30 “memorandum of understanding” had been signed with various EU organisations.
“There’s already a lot of cooperative structure that’s been bedded in, in a quiet way,” he said.
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