The UK-EU stand-off has become a worrisome prospect for market stability

Trade and finance differences between UK and European regulators could have detrimental impacts on the markets, writes John Gubert, who highlights the values of principle-based regulation which are currently being ignored.

The UK leaving the EU was, in my opinion, a grave error and not in the interests of the UK, and especially the City of London. But, as a democracy, we have to accept the will of the majority and live in a new world. There are though, two disturbing messages coming from the EU and they could have ramifications well beyond EU-UK relationships. First is in the trade area where detail is obfuscating principles and the second is in the finance area where the debate around equivalence is being mired in a politically inspired morass. Neither will add to the stability of markets and that should be the prime aim of legislators.

Some months ago, I attended a webinar on the issue of principle versus standard based regulation. Many years ago, in a simpler market, I was asked to create a workbook to help all areas of my business operate to the highest ethical and professional standards. This modest 30-odd page booklet was destined for all management and needed to be filtered down to all staff. It was very much principle based. The value of principle based is simple; principles are easy to understand and allow market sensitive standards to be constructed around them according to the needs of the area of activity impacted. Globally and across product there is no one size fits all solution. I appreciate this is no longer compatible with current regulatory thinking and regular readers will know that I have queried in the past the practicality of the lengthy tomes, not only of principles and standards, but the minutiae of detail also included around them in regulation. At the webinar, all espoused to the importance of principles but no one could bridge the gap between the objective and reality. To put it in perspective, I ran a global business for 13 years and the workbook I mentioned, in that period expanded by just over 30-fold. I have been retired for 15 years and hesitate to guess how many volumes the workbook has now engendered. My concern is that the volumes work as a reference manual or an all-embracing tome of “guilting” in the event of problems, but it does not serve to inculcate the principles of fairness, integrity and probity among market practitioners.

The trouble we have today, primarily on trade as financial services is not even subject as yet to a memorandum of understanding between the EU and the UK, is that principles are being ignored. Thus, the EU abandoned casually the all-important Irish protocol, albeit only momentarily until it realised the enormity of its actions. We see the same thing developing in some areas of border checks, especially with fresh food. This focus away from principles does not augur well for financial markets, which are more complex than physical trade, and begs the question whether either side will want an agreement in the end on equivalence or some similar arrangement.

The UK has currently full equivalence with the EU. It has not changed any regulations. It has expressed concern around EU bank regulation proposals, in respect of the treatment of IT investments; but it sees the move as too weak rather than looking to deregulate. Indeed, having worked with UK regulators, at times quite closely on key matters of policy, I would be astounded if the UK became a pirate regulator as they have always been hyper sensitive about ensuring market stability and protecting the public purse. It is true that in detail there may be variations; the buy-in provisions of CSDR are a case in point but in reality, they are out of step with global norms, horrific to apply and the wrong solution for tackling the problem. I have always believed that fail performance should be publicised without comment and firms, who believe they are a special case, can explain it to their market peers.

The equivalence debate is political. The UK dominated the EU financial sector. Attempts to limit easy access to Euro instruments, whilst the UK was a member, failed. The driver for the move was concern at the lack of control by the ECB over a key area of market stability. The post-Brexit EU solution was capital hits and administrative nightmares unless the business migrated to an EU member. So, the UK will lose flow and, with it, some related business. The EU will lose a source of liquidity as there will be no magic transfer of appetite. Some business will flow to the US and other markets. And some of the current capital backing to EU markets will be diverted to more profitable locations. The EU will have its control but it will be less robust than it could have been. The reality is that equivalence is not a debate around mutual standards but a political debate around the creation of a financial centre within the EU. As such I see it as unlikely to be resolved and the London market will drift from Europe, which I am sure is neither to its advantage or that of the EU.

The two concepts, principles and equivalence coalesce. Both are driven by protectionism. Post-COVID there is valid concern around trade supply chains and questions about the strategic importance of domestic champions for key products. These are valid; but national, or even regional, champions can only be achieved at a cost to the consumer, and, arguably, a reduction in competitive research. And any barriers to entry to other countries’ products could feed the nascent shoots of a pending trade war. The UK is not going to become Singapore zone Europe, although the popular EU characterisation of Singapore is false for its regulatory structure is not that of a buccaneer but a pragmatic principle based one with strong empowerment of a trusted financial and regulatory infrastructure. The UK too is likely to become a more pragmatic financial centre and would it be too much to hope that my famous workbooks could shed some detail and place responsibility and liability for adherence to principles firmly with market participants? Now that would contribute to the stability of markets!