The Windsor Framework was agreed on 27 February and was the culmination of an increasingly constructive dialogue between the UK and the EU, writes David Cook, partner of financial services at Penta.
It represents a promising and very welcome thawing of the post-Brexit relationship between the UK and the EU. There is a good deal of hope that this will be the start of a more mature relationship and more constructive approach in many areas.
The early signs are promising. The UK and France have held their first summit in five years looking to improve cooperation on a number of issues. There are also signs that the positive atmosphere might extend to other areas, including financial services. There have been suggestions that long-stalled Memorandum of Understanding (MoU) between the EU and UK around regulatory cooperation in financial services might finally be signed and brought into operation.
This MoU was agreed two years ago but has been held up due to problems around Northern Ireland. It will establish a joint financial forum that will bring regulators and policymakers from the UK and EU together.
However, it is important to remain realistic. By itself the MoU will not change anything and is unlikely to lead to a new approach to equivalence that many in industry are hoping for. However, the more opportunities there are for constructive dialogue away from the burning glare of politics, the more likely we are to end up with better regulation.
In Brussels, the current European Commission has about a year left before its agenda will need to wrap up. This means that there will be a big push to finalise the current round of regulatory proposals. In my career, I spent a lot of time in and around the negotiating room in Brussels and sentiment is important to how agreements are made. I do not believe the diplomats and parliamentarians working on regulation will change their objectives and red lines.
However, sentiment matters because it softens the approach to what is acceptable and how hard you push against things that you ideally would not want but are, ultimately, not red lines. Politics is often termed the art of the possible and, with a more positive sentiment towards the UK as the big financial centre sitting just outside the EU, more positive and open regulation might become possible.
The immediate areas that might benefit include the review of the Alternative Investment Fund Managers Directive (AIFMD).
This has been developed and negotiated under the shadow of the UK relationship as many functions of EU fund management are delegated to the UK. Regulators have been legitimately concerned about ensuring the proper management of risk, but the elephant in the room has been the level of delegation to the UK. The argument for these arrangements has always been about the efficiency and expertise available in the UK (or places like New York or Singapore for that matter), which should deliver better returns at lower costs for EU investors.
This regulation is expected to be agreed around the middle of this year and improved sentiment should help smooth the way for a more balanced and proportionate regulation that works for investors.
Similarly, the review of the European Market Infrastructure Regulation (EMIR) is centred around concerns about the role and level of clearing that EU firms undertake in UK clearing houses. This is a long running and very complex debate (actually predating Brexit) and it is driven as much by politicians as by regulators.
The EMIR review negotiation is at an early stage, but it is likely to be concluded in the early part of next year. Concerns about the level of clearing taking place in the UK and ambitions to get lucrative business activities into the EU are not going to go away. However, improving sentiment once again improves the chances of the EU co-legislators finding a landing that works better for EU businesses who would find it extremely expensive to move or split their use of clearing.
We are entering a new, more friendly EU-UK paradigm, the perceptions of the UK in the negotiating room will, hopefully, shift from the UK being a source of risk to the UK being an important partner of the EU. As explained above, this matters because EU policymakers need to reach an agreement that balances the regulatory and political objectives of the negotiators with the costs and other burdens of regulation.
Improved sentiment towards the UK could mean that the costs and burdens become more prominent factors in negotiators’ minds. It might be time for those stakeholders affected by the regulation to speak up and take advantage of the opportunity to ensure that policymakers understand their concerns and are ultimately more proportionate in the way they address risk.
This article was written for International Adviser by David Cook, partner of financial services at Penta.