Last month we sat down with Kay Swinburne, our Vice Chair of Financial Services to understand how London can keep hold of its position as global finance centre of excellence amidst the uncertainty. Here's what she shared:
With the trading corporation agreement (TCA) close to being ratified, it provides clarity for businesses moving goods between the UK and EU. For service businesses, which had an 80 percent surplus in the trade of services with the EU at the time of leaving, the landscape remains less clear.
There are some obvious areas where London needs urgent clarity from the EU. Data adequacy is a key issue to allow the flow of data between EU citizens and companies’ data to be held anywhere in the UK. There is a temporary agreement in place and a full decision is expected to be made in the coming months, but it will be key to allow financial data to be shared, whether that’s banks, financial markets or even sharing data between regulators.
However, there are several key areas that are far from being resolved which could hold back our financial services industry. So how can London’s FS sector move to a more pragmatic and successful working relationship with the EU that maintains our position as a global services hub?
When the UK first left the EU, many financial services businesses were happy to wait for the outcome of EU decisions on equivalence. There are approximately 40 articles within EU law that contain equivalence decisions, and around 27 different areas of FS are covered by them.
The EU is already putting forward major changes to its legislative package including changes around how they manage digital services and a big digital financial services package which will massively change the perimeter to include those companies that are outside of the normal financial services regulatory envelope. They are also reforming their ‘5 big beasts’ of financial services legislation, MIFID II, Solvency II, the Alternative Investment Financial Markets Directive, the Capital Markets Union and the Banking Union files which are all up for renew and review.
The UK meanwhile, is continuing as normal.
London will remain a global financial centre – but we need to look outwards not inwards, we need to not spend the next 6-12 months looking at our own systems of how we make law, we need to make our markets more efficient, making the changes we can do quickly to actually make sure that London remains the most competitive. When the first ‘Big bang’ happened, London took the opportunity to embrace electronic trading and it gave us a major competitive advantage. We now need to be brave.
There are many levers the Government can pull which will not in any way determine whether the EU gives us equivalence. We have to be nimble, to recognise that by putting principles in place, rather than prescriptive legislation we can trust the regulators to do the right thing. This can be strengthened further by putting in a scrutiny mechanism to make sure firms can hold regulators to account. We have world class regulators, who probably need a little more oversight by Parliament than they already have, but there’s a huge opportunity to be able to move this forward.
We should move from chasing equivalence, which in most cases only provide very small access points, to looking at the broader picture and maintaining London’s global position as a finance centre of excellence.
There has been a shift in the attitudes of KPMG’s global network of professional firms providing financial services over recent months away from “let’s keep the rules the same”, to “how do we move quickly to more competitive markets”. I was involved in the Kalifa review and there are lots of things we can do to make London the best place to do business going forward without waiting for decisions about our future to come from the EU. Ultimately, we need to embrace the new digital capital markets and digital currencies, we have lots of opportunities to lead the world, but we need to take them. We welcome the Government’s recent commitment to adopt a number of the recommendations from the Kalifa review, including the launch of a Central Bank Digital Currency (CBDC) Taskforce to coordinate the exploration of a potential UK CBDC.
Regulated entities in London have already moved trillions of euros across to the EU and are under pressure to move people as well. Amsterdam has now overtaken the UK on equities trading in a secondary market in the last few months and it’s also affecting the fixed income markets and certainly some of the derivatives trading and clearing has been impacted.
The EU has very clearly stated that it will only make equivalence decisions in favour of the UK if it is in their commercial interest to do so. As you would expect, the EU will only allow the UK to participate when it suits the EU’s economic or security interests. London needs to face into that and be the master of its own destiny using our world leading regulators, legal and employment environment, and world class financial talent and a renewed appetite for financial innovation.