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Brussels bid to cut off the City is backfiring, watchdog warns

·4-min read
The City
The City

A Brussels plot to lock the City out of European markets has backfired and harmed the finances of banks on the Continent, the boss of the UK's finance watchdog has said.

Nikhil Rathi, head of the Financial Conduct Authority (FCA), said in a first major intervention that European Union lenders have lost market share because of resistance to a so-called equivalence deal that would have preserved ties with Britain.

He added that the UK will not now pursue access to the EU at any price - and vowed to use the country's post-Brexit freedoms to redraft cumbersome regulations.

Mr Rathi said: "EU banks are now no longer able to offer to their clients full access to all pools of global liquidity for the trading of interest rate swaps and certain credit derivatives, as UK venues have retained material market share in various products.

"This loss of access to liquidity reduces competitive choice in the market for UK and rest of the world clients and, unsurprisingly, it has been reported that some EU banks have lost market share in these market segments.

"This means higher costs for EU firms, with a direct impact on the prices they can offer to their clients. And inevitably, UK and rest of the world clients, are left with no choice but to plan for further contingencies in which EU firms are unable to service a wider range of their needs."

The interest swap market is crucial for a host of products offered to ordinary consumers, such as fixed rate mortgages. If banks are less able to access key trading hubs such as the City - which dominates the European derivatives market - then costs for their customers will ultimately go up.

Mr Rathi's comments follow a difficult period leading up to the UK’s exit from the EU, with the finance sector largely excluded from the Brexit trade deal and City firms now stripped of their vital EU passporting rights.

Firms had been relying on access through an equivalence regime, where Britain's rules are deemed to be so similar to the EU's that cross-border trading is fair to both sides.

The UK has granted equivalence access for European firms in a host of areas. Even though British and European regulations were exactly the same at the time of Brexit, and remain virtually identical, the EU has refused to reciprocate. This has forced its banks to go to less developed markets on the Continent for some services.

Banking insiders have said in recent weeks that they have largely given up any hope of being granted equivalence.

Speaking to the Association of Foreign Banks, Mr Rathi added that the UK would not "target equivalence at any cost", including passing up opportunities to make markets function better, and said he recognised the "increased flexibility" now available due to Brexit.

Nikhil Rathi, chief executive of the FCA - Chris J. Ratcliffe/Bloomberg
Nikhil Rathi, chief executive of the FCA - Chris J. Ratcliffe/Bloomberg

He said: "We will use our autonomy to regulate for the benefit of UK financial markets and consumers."

It comes days after bankers said Treasury officials had indicated that they "want to flex their Brexit muscle" with an overhaul of City rules.

Earlier this year, Bank of England Governor Andrew Bailey said that the EU appeared poised to lock out British banks.

In response to a question from The Telegraph after a speech to finance chiefs in February, Mr Bailey said: "Is the EU going to cut the UK off from itself? There are signs of the intention to do so at the moment, but I think that would be a mistake. I think that would lead to the fragmentation of markets."

Mr Bailey on Thursday urged the EU not to try and force banks to move out of London. He said there is a "very clear difference" between simply refusing to grant equivalence and actively urging companies to relocate.

Financial services exports are worth £56bn, according to industry body TheCityUK, and ministers are racing to boost the attractiveness of the City post-Brexit amid fears among bankers that the sector would be left in the lurch.

Banks have moved around £1.3 trillion worth of UK assets into the EU as a result of Brexit and almost €6bn of EU share trading shifted from London to the continent in the first trading day of this year.

Mr Rathi, who was a private secretary to Tony Blair and Gordon Brown from 2005 to 2008, joined the FCA last October following years of allegations that the watchdog had become too soft.

In his speech on Thursday he indicated that the regulator would get tougher on misconduct, saying there will be a "rigorous review of all firms seeking to enter the UK authorisation gateway".