The Windsor Framework marks a promising and very welcome thawing in 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 that we will see a more constructive approach in many areas, including around financial services regulation.
There are already signals that the long stalled MoU between the EU and UK around regulatory cooperation in financial services will finally be signed and brought into operation. This MoU was agreed two years ago, but has been held up due to problems in around Northern Ireland. It will establish a joint UK-EU financial forum that will bring regulators and policymakers from the UK and EU together. By itself it will not change anything and is unlikely to lead to a new approach to equivalence. 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 more effective and proportionate regulation.
More immediate is the potential impact on the current financial service negotiations. There are a number of examples where regulation is being negotiated in Brussels under the shadow of the UK relationship. Included in this is the review of the Alternative Investment Fund Managers Directive (AIFMD). One of the key issues in this debate is around the treatment of fund management delegation. Regulators are legitimately concerned about ensuring the proper management of risk, but the elephant in the room is the level of delegation to the UK and this has been an implicit driver of the negotiations.
Similarly, the review of the European Market Infrastructure Regulation (EMIR) is centred around concerns about the role and level of clearing but EU firms in UK clearing houses. This is a long running and very complex debate (which actually predates Brexit) and it is driven as much by politicians as by regulators.
Assuming the Windsor framework is adopted and we are entering a new, more friendly paradigm the size of the UK elephant in the negotiating room might end up shrinking. 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. A smaller UK elephant should mean that the costs and burdens of the regulation become a more prominent factor 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 regulations are more proportionate to the risks they address.