Articles and opinion
First published in Global Risk Regulator, part of the FT group on 22 May 2018
Why ‘frameworking’ might be the way forward for Brexit UK
The UK should focus on a framework-based approach for financial services in light of its decision to leave the EU and the rapid growth in fintech, says Rosalyn Breedy, partner at law firm Wedlake Bell.
As the UK moves towards a new era for the financial services and with the acceleration of advances in fintech, is it time to move the agenda on from a focus on passport access to the EU single market towards development of a global framework for financial services regulation? As a major hub for international finance, the UK has an opportunity to highlight its leadership in the development of the international regulation of financial services and fintech.
I believe that a longer-term focus is required, which involves the opening up of all financial markets and embracing new technologies that are underpinned by mutually agreed global technical and regulatory standards. The benefits would be more effective, rapid and efficient allocation of capital to all compliant economies and increased availability of talent and innovation, with a view to providing all citizens with insurance, savings and pensions.
The UK is ideally positioned to take a lead in this because of the size and international outlook of its own financial markets, the role that its government and regulators have played historically and its continuing contribution to the setting of global financial standards.
The principle of EU passporting depends on one home state regulator taking responsibility for authorising a financial firm or product pursuant to EU adopted regulation, predicated on adherence to global standards and the EU financial services action plan and then a reliance on harmonisation to enforce similar conduct of business rules.
This sounds good theoretically; however, in practice, the EU passporting approach has not delivered a frictionless single market for financial services and nor has it adapted consistently to the regulation of fintech services.
Unless it addresses this, European companies will not have full access to the world’s capital, global talent and innovation to meet their growth needs and therefore will not be able to fulfil the saving, insurance and retirement needs of EU citizens.
According to CityUK, Britain’s financial services trade surplus of $77bn in 2016 was more than the combined surpluses of the next two countries, the US and Switzerland. The UK’s banking sector is the largest in the EU and fourth in the world. Its asset management sector totalled $8100bn assets under management (ranking alongside US and Japan as one of the largest sectors in the world) with $2600bn being managed on behalf of overseas clients; and the UK’s insurance sector is the largest in Europe and fourth largest in the world.
The UK has the experience, expertise and commitment to play a leading role with other significant financial services economies to develop a regulatory framework fit for purpose and able to adapt to new developments. Its regulatory credentials include:
- HM Treasury, the Bank of England and the Financial Conduct Authority (FCA) are members of the G20 established Financial Stability Board to co-ordinate financial policy;
- the UK was one of 10 founding members of the Basel Committee of Banking Supervision, which is the primary global setter of standards for the prudential regulation of banks and provides a forum for regular co-operation for banking supervisory matter represented today by the Bank of England and the Prudential Regulatory Authority (PRA);
- the FCA is a member of the International Organization of Securities Commissions;
- the PRA and FCA are members of the International Organisation of Insurance Supervisors;
- the Bank of England is a member of the Committee on Payments and Markets Infrastructure; and
- the UK is a member of the financial action task force, which is concerned with money laundering and terrorist financing threats to the financial system.
The framework alternative
One of the biggest problems faced in financial services is the significant level of pension fund underfunding globally. According to a report by Citibank in 2016, the total value of unfunded or underfunded government pension liabilities for 20 Organisation for Economic Co-operation and Development countries is $78,000bn.
Many corporations have consistently failed to meet their pension funding obligations and most UK and US corporate pension plans remain underfunded with an aggregate funding status in the US of 82%. Pensions underfunding is a particular problem across Europe as the aged 65+ population looks set to rise from 17% in 2015 to 26% in 2050.
A significant amount of pension provision is still provided by heavily indebted governments and the move to personal responsibility for direct contribution schemes has not been easy. Savers find the regulatory and taxation treatments difficult within their home jurisdictions and this is exacerbated if individuals wish to move country, as differing regulatory and political approaches are taken by countries throughout the EU and elsewhere.
The pension underfunding challenge could partly be addressed by undertaking a global framework of financial regulation. This would enable larger providers to provide and market scalable solutions.
Another area that requires attention is the regulation of financial services technology, particularly as many of the new players are from outside of the EU.
According to a recent report by the Financial Stability Board (FSB) global investment in fintech reached $21bn, marking a fivefold increase over 2013 with much of this investment occurring in the US and Asia, where large and successful fintech firms operate in the payments and lending space, and new investments going into insurance, distributed ledger technologies and wealth management.
According to the FSB, while many fintech activities were covered by existing regulatory frameworks and 20 out of 26 jurisdictions surveyed have taken or plan to take regulatory measures to respond to fintech, the scope and scale of changes and planned changes varied substantially.
Adopting a common framework approach globally would address investor protection requirements, as well as reducing systemic risk and preventing new players from engaging in regulatory arbitrage.