A lot can happen in a year. Last June, I was preparing to move to the FCA to take up the role of Chief Executive on 1st July. It was the week before I moved that I realised how much of my time in my new job would be taken up by Brexit.
Quite simply, our job at the FCA is to get on with it, to roll our sleeves up and play our part in implementing the decision made by the people of this country to leave the European Union (EU), and what goes with it. I can’t deny that Brexit is a lot of work, and it did not feature in our business planning as a reality until a year or so ago, so a lot of sleeves have had to be rolled up.
Open market
Open markets in financial services, freedom of location and free trade are important to the functioning of the global economy. Well integrated financial markets support economic growth and employment. They reduce the cost of access to financial services by encouraging competition. It is important to always have in mind the commitment of G20 leaders, at the Pittsburgh Summit in 2009, to avoid fragmentation of markets, protectionism and regulatory arbitrage.
But we cannot take open markets, freedom of location and free trade for granted. Firms should be able to take their own decisions on where they locate, subject to appropriate regulatory arrangements being in place which preserve the public interest. Authorities should not dictate the location of firms; rather, we should allow open markets to shape those choices, always subject to our public interest objectives.
There is ample evidence that open markets in financial services and free trade can exist safely without common detailed rules and shared regulatory institutions. Consistent outcomes of regulation are what matters. In sum, open markets, freedom of location and free trade in financial services matter a lot and should be preserved.
Implementing Brexit and the impact on financial services
When I hear people say that firms need to re-locate in order to continue to benefit from access to EU financial markets, I start to seriously wonder. Does Brexit have to mean abandoning the benefits of free trade and open markets in financial services? It should not. Does it require membership of the Single Market to get the benefits of free trade with the EU? No. Does Brexit mean abandoning the use of regulatory co-operation to ensure sufficient alignment of standards and outcomes so that open markets can prevail? It should not. Does Brexit mean we are now saying that – even with such alignment – economic welfare, market integrity and the interests of consumers would be so damaged by open markets that the only way to be safe is to resort to policies to make sure firms are on your patch? The answer should be no. Brexit should not be conflated with whether or not to have open global financial markets and trade in financial services. The economic and financial cost of losing open markets is too great to be justified and is not a necessary response to the choice of Brexit.
Development of institutions
From the First World War onwards, the development of institutions of state representing the public interest has produced another long-running issue, namely – what is the correct balance of international and domestic institutions? The most important international institutional structures grew out of the Bretton Woods Agreement and the treaties that created the European Union. These were agreements about how to interpret and put into practice the role of the state in terms of the balance of national, regional and global institutional structures. They interpreted the meaning of state sovereignty and, in doing so, sought to resolve the tension between the economic interdependence of states and national determination. As part of that outcome, the EU has over time been a strong proponent of free trade.
Question the fundamental principles of free trade
Brexit does not need to lead to calling into question the fundamental principles of free trade and open markets. Brexit is undoubtedly a very big development, but it should sit within the overall scope of how to arrange the institutions of state to enable trade to happen while maintaining the public interest in stable, safe and fair financial services.
Moreover, we should recognise that this public interest is not limited to the UK public interest. Why? This is probably best summed up by the IMF in its Financial System Stability Assessment of the UK published last year, namely that financial stability in the UK is a global public good. This means that the institutional structures that underpin and preserve the public interest in order to enable open financial markets and free trade should, as they do now, represent the global as well as domestic interest. That’s what it means to have the world’s leading financial centre here in London.
What do we need to preserve open markets and free trade?
What sort of institutional structure of regulatory co-operation do we need to preserve open markets and free trade alongside Brexit? It is worth starting on this issue with a broad reflection on differences of approach to regulation between the UK and the EU. In my experience, the UK approach at its best is rooted in strong principles which reflect clear public interest objectives. These principles are then put into practice as rules which allow for the use of supervisory judgement by the relevant authority. I would describe this as using judgement against a framework of rules. It can work well: it is focused on outcomes but depends on a very clear articulation by the regulator of the meaning of the principles that are established out of the public interest objectives given by Parliament. It can work less well when the wrong principles are embedded, which was the case in the run up to the financial crisis. The problem there was not principles-based regulation per se, but rather that the governing principles appear with the benefit of hindsight to have been inadequate in terms of prudential requirements, firm governance and (in some areas) fair outcomes for consumers. In response, we have had to construct a fresh system with stronger principles as reflected in the FCA’s recent Mission.
EU approach to regulation
I would describe the EU approach to regulation as far more one of detailed rule-making as the means to create harmonisation. The challenge is different in a union of 28 countries where there is a risk of divergence among the various authorities.
The rules-based approach was no better at dealing with the pre-financial crisis build up excesses than the principles-based approach. The existence of these two approaches obviously begs the question, in the context of Brexit, of what institutional framework of regulation could preserve open markets and free trade in financial services? It will require a strong co-ordination of regulatory institutions across the UK and the EU. The current system is one of common rules which underpin market access, but where the UK has been able to exercise an influence over the form of the rules, and conduct largely independent supervision to put those rules into effect. Over the years, we have argued consistently and successfully that the application of rules through supervision should not follow rulemaking in terms of centralisation, something that is not a necessary condition of stable open markets. Recently, we have seen some movement of EU oversight into the application of rules.
Conclusion
In conclusion, arguing that Brexit should not mean an end to open financial markets does not amount to special pleading for the financial services industry. That is not my job. Rather, my job is to achieve good financial conduct which includes the integrity of markets, the fair treatment of consumers and ensuring effective competition. My counterparts in other countries have the same objectives. There is nothing that I have seen in Brexit which changes that. Although the Repeal legislation changes the legal basis for important parts of our framework, it does not change our objectives.
In the ten years since the outbreak of the global financial crisis we have come a very long way in rebuilding financial regulation to serve the public interest of financial stability and good conduct. The G20 and Financial Stability Board deserve great credit for leading this work internationally. This provides the institutional structure for trade in financial services. I have no doubt that we can continue to achieve these objectives with Brexit. That sounds bold, but I strongly believe it. My view is that if there is a commitment on all sides that the UK and the EU maintain substantially equivalent regulatory arrangements in future, that it will not be necessary to restrict open markets and free trade in financial services and therefore not necessary to limit the freedom of firms on location. And therefore, I see no reason why we should sacrifice open financial markets and free trade, as an inevitable response to Brexit.
Source: Thomas Reuters Newsmakers. An impresion of the speech by Andrew Baile, Chief Executive of the FCA.
