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Sir Jon Cunliffe: globalisation will challenge financial regulators

Out-Law News | 27 Feb 2020 | 2:05 pm | 2 min. read

Financial regulators in the UK and EU will have to work together to address financial stability risks arising from cross-border financial activity and the growth of financial technology, a deputy governor of the Bank of England has warned.

Sir Jon Cunliffe, who is the bank's deputy governor for financial stability, said that the UK and EU would need to work closely together to address future challenges, such as changes to cross-border payment systems, the growth of artificial intelligence and the impact of climate change. Cunliffe spoke about the challenges around what he called the "governance of financial globalisation" (11-page / 211KB PDF) at an industry conference in Berlin earlier this month.

Cunliffe said that increasing globalisation of financial services, in the sense of cross-border financial services and integrated global capital markets, "mean that our economies can benefit from better matching of saving and investment, from greater choice and from risk sharing and diversification". However, it also means that financial risks are imported and exported across national borders, he said.

"We saw just over a decade ago the damage that can come from financial globalisation if we do not have appropriate governance at the international level," Cunliffe said.

"It took the great financial crisis and the near-death experience of the global economy to bring home the lesson that a step change in governance was needed, and to create the political will to make it happen … We need to make sure we can sustain this especially in the face of new challenges," he said.

Day Josie

Josie Day

Senior Practice Development Lawyer

Whatever the direction of travel for UK and EU regulators, the need for candid dialogue and ongoing cooperation by supervisors will be essential.

Cunliffe said that the UK and EU had a "good basis on which to build" future regulatory cooperation, since their regulatory regimes will overlap until at least the end of the post-Brexit transition period at the end of this year. However, after this point, he said that in the future regulatory relationship a number of considerations mattered, including "similar outcomes and deference", and "deep supervisory cooperation".

"[T]he UK cannot outsource regulation and supervision of the world's leading complex financial system to another jurisdiction," he said. "That argues against a relationship built on textual alignment of our regulatory frameworks." "Rather, and in line with the way in which global governance has developed, it requires a relationship built on the assessment of similar outcomes, in a non-discriminatory way, paying due respect to home country regimes in line with [Financial Stability Board] norms."

"Arrangements for shared supervision … need to be worked out carefully, subject to agreed procedures and, crucially, recognise the primacy of the lead supervisor. And, given the systemic importance of global infrastructure to many jurisdictions, they must above all be stable. And finally, these arrangements need to be reciprocal and proportionate," he said.

Financial regulation expert Josie Day of Pinsent Masons, the law firm behind Out-Law, said: "Leaving the EU means the UK no longer has the role it had as an EU member state in shaping the direction and detail of the EU's financial services framework. To influence the approach to the risks and challenges of financial globalisation, the UK will need to use different governance channels."

"Over time, the EU's and UK's governance responses to such risks and challenges could diverge. As a result, 'textual alignment', as Cunliffe calls it, of law and regulation in the UK and EU would end. If so, regulators may then potentially focus more on comparability of outcomes," she said.

"Whatever the direction of travel for UK and EU regulators, the need for candid dialogue and ongoing cooperation by supervisors will be essential - not just between regulators in the UK and EU, but also on the wider international stage. In an increasingly global and interconnected financial services market, the supervisory relationship between the UK and EU regulators will be just one part of the work of UK regulators going forward," she said.