The UK is looking at a raft of trade deals to establish a template enabling greater cross-border financial services activity to boost the City of London’s fortunes.
Following the UK’s departure from the European single market at the start of this year, the British government is promoting an outcomes-based approach towards countries recognising each other’s regulatory frameworks as a basis for permitting cross-border financial services, rather than basing those judgements on the similarities of their respective regimes.
It is an approach that has long been promoted by the US Commodity Futures Trading Commission, for instance.
In support of this strategy, on February 1, trade minister Liz Truss formally applied for the UK to join the 11-country Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which mainly covers physical trade, but has been touted by the British government as being good for fostering services exports.
The CPTPP includes fast-growing economies such as Mexico, Malaysia and Vietnam, along with established regional players such as Japan, Australia, New Zealand and Canada.
Most of its members have voiced support for UK membership suggesting that its application should be successful. Accession talks are due to start shortly. If the UK becomes a member it will take the CPTPP’s weighting to 16% of global gross domestic product, similar to the EU’s.
The UK government claims the benefits of joining the CPTPP include promoting modern digital trade rules allowing data to flow freely between members, protecting commercial source code and encryption
The UK’s Department of Trade claims the benefits of joining the CPTPP include promoting modern digital trade rules allowing data to flow freely between members, protecting commercial source code and encryption. These are all key tenets underpinning cross-border financial services.
Despite there is potential for the UK to sell more financial services into the CPTPP, industry sources point out that this trade is dwarfed by the amount of business done with the EU.
In addition, the EU’s single market provided greater market access for UK wholesale financial services, though this was accompanied by tough regulations over which the UK only had limited influence.
Nonetheless, the CPTPP could later indirectly pave the way for more access to the US market – should US president Joe Biden seek to join, possibly to reinforce alliances to help counter China’s growing geo-political influence. The trade partnership was originally pioneered by the US, but former US president Donald Trump withdrew from it in 2017.
Financial services body, TheCityUK, supports the UK’s bid to join the CPTPP describing it as making a strong case for open global markets and trade and will give the UK a stronger hand in influencing other members towards liberalising cross-border data and payment flows and the mutual recognition of professional qualifications.
Setting a precedent
In another move, the UK and Switzerland are advancing talks to forge a mutual agreement in financial services giving greater mutual access to each other’s markets. Sectors covered include insurance, banking, asset management, capital markets and market infrastructure. The two countries host Europe’s largest financial centres.
“Our ambition is to deliver one of the most comprehensive agreements of its kind in financial services as part of our plan to seize new opportunities in the global economy now we have left the EU,” said British chancellor Rishi Sunak.
The two countries are looking to forge an ambitious agreement on the mutual recognition of each other’s regulations, hoping it will set a precedent for agreeing similar deals with other jurisdictions. Both have just recognised each other’s trading venues allowing securities listed in both countries to trade on them. By contrast, both countries are at loggerheads with the EU over the same issue.
Indeed, industry sources are pessimistic about the outcome of the talks between the UK and EU leading to the mutual recognition of each other’s regulatory frameworks to support cross-border financial services.
The UK and the EU are aiming to sign a memorandum of understanding by the end of March with industry sources anticipating it will only cover data sharing and supervisory issues relating to financial stability.
On January 22, Mairead McGuinness, European commissioner for financial services, stated that the EU has no fixed timeline for reaching a decision on the matter and warned the UK not to loosen its rules.
The City of London is looking for regulatory equivalence from the EU in around 40 areas, but so far temporary equivalence has only been granted to two – clearing until June 30, 2022 and central securities depositories until June 30, 2021.
However, the UK has granted much broader equivalence to EU-located firms, possibly to maintain the City’s competitiveness or as a gesture of goodwill. Nonetheless, recent comments from UK regulators suggest they are not keen on gaining widespread EU equivalence if it means being indefinitely shackled to EU rules.
In what might be a blow to the City, the European Commission on January 27 granted equivalence to US clearing houses, a move that might be designed to weaken the UK’s grip over euro-clearing by allowing US firms to compete for such business. If so, UK clearing houses may not be given equivalence after June 2022. However, the EU said the decision was years in the making and builds on earlier equivalence decisions such as recognising US over-the-counter derivatives trading in 2017.
In addition, the EU has ambitions to build its own capital markets and to reduce reliance on London and New York for financial services.
The UK, meanwhile, is set to tailor its regulatory framework this year to make it more nimble and adaptable, but a bonfire of its rules is not expected. UK policy-makers have publicly committed to following international standards set by the likes of the Financial Stability Board and the Basel Committee on Banking Supervision.
This article first appeared in The Banker's sister publication Global Risk Regulator.
