The EU is being pressed to end its reliance on the City of London after Brexit
THE EU must wean itself off its dependence on the City of London for access to capital markets and toughen up its financial regulation to prevent a race to the bottom after Brexit, the European Commission warned yesterday.
London is Europe’s biggest capital market, but Brexit means that the EU’s major source of non-bank capital will be outside the EU’s regulatory framework.
Brussels fears that could pose a challenge to its abilities to set rules and regulations in the sector, and is looking to break its addiction to the City by onshoring capital markets and establishing new ones on the Continent. “This is particularly important in light of Brexit, as Europe’s biggest financial centre is leaving the single market,” said Valdis Dombrovskis, an executive vicepresident of the European Commission.
EU efforts to improve access to capital markets date back to at least 2014 but the Commission hopes that Brexit, the economic hit of coronavirus and the need to finance the “green transition” will give it fresh impetus.
Mr Dombrovskis admitted the EU’s dependency on financial centres outside the EU was “one of the reasons why we are developing capital markets”. “Brexit has made it more urgent – there are specific risks which we are seeing with so much financial activity now moving out of the EU,” he said.
The Commission has published an action plan to build a capital markets union, a long-term strategy to establish large integrated sources of finance for businesses in the bloc.
“Brexit has a significant impact on the Capital Markets Union. It further strengthens the need for the EU to have well functioning and integrated capital markets,” the Commission said in a communication to EU governments.
The EU would have a number of lesser, fragmented financial centres dotted around the bloc after Brexit, rather than a single dominant hub in London, it added. That made it even more important to have strong financial supervision at the EU level to prevent competition from lower standards in London or elsewhere in the bloc.
“An enhanced single rule book and effective supervision will be crucial to prevent regulatory arbitrage, forum shopping and a race to the supervisory bottom,” the Commission said.
Sir Jonathan Faull was the top EU civil servant on financial services regulation and the most senior British official in the Commission. He oversaw work on the Capital Markets Union. He told The Daily Telegraph: “It’s not all or nothing. The EU cannot and will not ‘shut out’ the City, but the relationship will be different as Brexit takes hold, regulation and supervision diverge and international developments are negotiated and implemented differently.”
Sir Jonathan, who is now chairman of European public affairs at the Brunswick Group, said UK-EU links remained deep and both sides faced similar challenges. He said the relationship “could settle down to a stable mixture of competition, co-operation and management of differences”.
The EU has already begun the process of bolstering its financial regulators ahead of the end of the transition period on Dec 31. Policymakers face a balancing act between not shutting down EU businesses’ access to capital in London but keeping regulatory control. London and New York are far larger in the sector and could carry more heft in setting rules and regulations.
The UK will also have to weigh up how far to diverge from EU standards because it could risk losing access to the single market.
After the end of the Brexit transition period, UK financial services’ access will be governed by equivalence – a system of regulatory recognition that can be withdrawn unilaterally by the Commission at as little as 30 days’ notice.