Bank of England
The international financial system and UK/EU equivalence – speech by Andrew Bailey – 10 February 2021
Andrew Bailey (Governor of the Bank of England (BoE)) has given a speech at the Financial and Professional Services Address looking at the international financial system, particularly focusing on UK/EU equivalence, possible future UK rule changes and international supervisory co-operation.
International financial system
The speech highlights the benefits of an open global financial system and the progress made towards such a system since the Second World War but particularly since the global financial crisis, with wide-ranging regulatory reform introduced to achieve greater global financial stability and regulatory co-operation. COVID-19 has been the first big test of this system and the international co-operation that has been built up through it. Mr Bailey concludes that, if not perfect, the core of the financial system has stood up well to this test.
UK/EU financial services equivalence
The speech notes that the EU is yet to grant the UK equivalence status more broadly, having so far provided two temporary equivalence decisions for clearing houses and central securities depositories in order to maintain financial stability.
The fact that the UK and EU regulate their financial services industries based on internationally agreed standards and have a common basis for their rules should provide a reasonable basis for equivalence. The UK and EU have uniquely close standards and closer than, for example, Canada, the US, Australia, Hong Kong and Brazil at the point these countries were granted equivalence.
Both UK and EU rules may necessarily need to change and adapt going forward in light of global developments and not to do so could well “cause trouble” later on. The key point here is good practice: national regulatory authorities need to be transparent, explain rule changes when they take place and that they remain consistent with international standards.
Potential rule changes
The speech includes three areas where rule changes are being considered and emphasises that these are consistent with international standards and do not present barriers to equivalence decisions being reached:
-
-
-
-
-
- small banks’ regime: the UK is considering a strong but simple regulatory framework for small banks that are not internationally active. The speech cites the examples of US and Switzerland which have similar regimes and have also been determined as equivalent to the EU in several areas;
- exclusion of software assets from bank capital: the UK is intending to consult on excluding software assets from bank capital. It has found no evidence that such assets have value in stress and their inclusion would give a false picture of a bank’s loss absorbing capacity. The exclusion would be in line with international standards given that Basel standards do not include intangible assets in bank capital. Intangible assets include software assets in the UK; and
- Solvency II: the UK is reviewing the Solvency II regime and it is right that it should do so given that some aspects of it have not worked optimally for the life insurance market and the regime potentially works better, overall, for the non-life market.
International supervisory co-operation
It is important that the application of rules and regulatory supervision is effective across borders, particularly between the UK and the EU, and that there is co-operation between regulatory authorities globally. The UK has taken significant steps to achieve this with 36 memoranda of understanding between the Bank of England and PRA, and supervisors across the EU.
Mr Bailey concludes by welcoming the joint declaration on financial services under the Trade & Co-operation Agreement and noting that the memorandum of understanding to be agreed by March 2021 will enable discussions on moving equivalence determinations forward.
Andrew Bailey speech on equivalence and an open financial system
European Commission
Trade Repositories – EC publishes Delegated Regulation on annual supervisory fees – 9 February 2021
The European Commission has published for consultation a draft Delegated Regulation (Ares(2021)1122309), which amends Delegated Regulation (EU) 1003/2023 and (EU) 2019/360 in relation to the 2021 annual supervisory fees charged by the European Securities and Markets Authority (ESMA) to trade repositories (TRs).
The Delegated Regulation sets out the methodology for these fees for the purposes of Article 72(3) of the European Market Infrastructure Regulation ((EU) 648/2012) and Article 11(2) of the Securities Financing Transactions Regulation ((EU) 2015/2365) respectively. The draft new Delegated Regulation revises the reference period for the calculation of applicable turnover for the purposes of the supervisory fee from 2020 to January to June 2021.
The reason for this amendment is that two UK TRs have transferred part of their services and activities to the EU as a result of Brexit. As they commenced operations as EU TRs from January 2021, their 2021 annual supervisory fee would be negligible under the current reference period. By altering the reference period to January – June 2021, their supervisory fees can be calculated on the basis of their greater applicable turnover across that period.
The consultation closes on 9 March 2021.
Webpage inviting views
