May's Brexit Vow to Retake Control Puts BOE's Sway at RiskBy
Demand for access to single market may diminish BOE autonomy
Lawmaker says British financial regulators face a ‘quandary’
Prime Minister Theresa May’s promise to “take back control” by leading the U.K. out of the European Union may leave the Bank of England with less influence than ever over the financial rules it enforces.
Sam Woods, head of the Prudential Regulation Authority, has made clear that the BOE’s oversight arm wants to avoid becoming a taker, rather than a maker, of the rules it applies to about 1,700 banks, building societies, credit unions, insurers and major investment firms. At the same time, he has said financial firms on both sides of the Channel need to retain a “significant degree of market access” after Brexit.
These two goals may prove hard to wed.
With May intent on taking the U.K. out of the single market, access for London firms will probably be contingent on British rules remaining equivalent to those in the EU, and that judgment will be made in Brussels. As a result, rather than flexing its policy muscles, the PRA may find its hands tied by EU institutions where the U.K. no longer has a voice.
“U.K. regulators are in a quandary,” said Stephen Hammond, a Conservative lawmaker on the Parliament’s Treasury Committee. “We’re at the very early stages of the process at the moment, but the worry overall is about the loss of influence. They’re not going to have the same level of influence as they had as members” of the EU.
The sheer size and systemic importance of London’s financial hub to EU markets has given the U.K. a leading role in shaping the bloc’s financial-services policy over the years. BOE Governor Mark Carney said in 2015 that the U.K. had put in place a solid financial-stability framework built on sound EU rules with enough flexibility to tailor them to British needs.
The U.K. didn’t always get its way, of course. The BOE has long railed against the EU’s bonus cap for bankers, which Woods’s predecessor Andrew Bailey disparaged as “bad policy.” Yet the cap also helps to demonstrate the constraints that may remain on British rule-makers after Brexit.
Most EU financial-services laws contain provisions for firms outside the bloc to gain privileged, if targeted, access to the single market. Such provisions are usually based on a so-called equivalence decision, whereby the European Commission, the EU’s executive arm, deems a country’s rules and oversight of specific business lines are as tough as its own.
This need to stay equivalent so that U.K.-based firms could retain single-market access could therefore undermine the autonomy Woods seeks, and could even stop him changing policies the BOE has long opposed, such as the bonus cap.
“If it transpired that there was some trade-off between access to the single market and our ability to have some influence over how we write our rules and how we do supervision, that trade-off should be weighed very carefully,” Woods told U.K. lawmakers last year. “Running a leading global financial center and a massive banking system with a set of rules over which you have no influence is not something you would easily choose to do.”
Equivalent doesn’t mean identical, however. The commission usually looks at results, not a line-by-line comparison of legal documents. To date, it has adopted 212 equivalence decisions covering 32 jurisdictions, led by Japan, the U.S. and Canada. And this may give the BOE some room for maneuver after Brexit.
While the BOE’s sway over rules in Europe is uncertain, it will retain its seat at the table in global bodies such as the Basel Committee on Banking Supervision, which sets standards for the world’s biggest banks. Carney heads the Financial Stability Board, an international regulator created by the Group of 20 nations after the financial crisis.
Bailey, who now leads the U.K.’s Financial Conduct Authority, has argued for a broader understanding of equivalence based on global standards over which Britain will retain influence after Brexit.
“If this is going to be based on what I call a system of equivalence, which you could imagine happening, then the setting of the equivalent standards has to be something that U.K. regulators can influence,” Bailey said in Parliament last year. “I do not think any of us would feel comfortable if we were just a taker of standards, as opposed to being involved in the making of them.”
Bailey said equivalence standards should be set at the global level, without getting into the weeds of implementation. This would allow national authorities to deal with the detail “without jeopardizing equivalence.”
It will be EU rules that matter when May triggers secession talks as soon as this month, however. And that will give Woods and Bailey, along with British lawmakers, plenty to think about.
“We’re bound to try and see what we can get in terms of equivalence. That means that we pretty much have to follow along,” said Charles Goodhart, director of the financial regulation research program at the London School of Economics and a former BOE policy maker. “Equivalence is to be determined by the EU, so we won’t be able to appeal should there be a statement that the EU think we’re not equivalent and we think we are.”