Sunak outlines vision for post-Brexit UK financial services

Out-Law News | 11 Nov 2020 | 9:46 am | 3 min. read

Plans to more closely link UK financial services to the fight against climate change, grow the country's reputation for fintech innovation, and reduce regulatory frictions affecting financial services companies that would otherwise arise as a consequence of Brexit, have been announced by UK chancellor Rishi Sunak.

In a speech outlining the UK government's vision for UK financial services after Brexit, Sunak confirmed a number of forthcoming consultations, including one which points towards forthcoming reform to the UK's regulation of investment funds.

Oliver Crowley, an investment funds and asset management specialist at Pinsent Masons, the law firm behind Out-Law, said: "The chancellor is making a clear statement – the UK financial services market is strong domestically, has ambitious growth plans globally and this will not be hampered by Brexit. Whether this entails leading on fintech, green finance, or building relationships with key financial services jurisdictions, the UK is proposing to lead from the front."

"The sector will eagerly await further details of the consultations that have been announced with regard to these proposals to understand their impact in practice, including how any divergence from EU rules might affect the UK securing equivalence decisions from the EU" he said.

Sunak confirmed that the Treasury has decided to issue a number of 'equivalence decisions' relevant to financial services in countries that form the European Economic Area (EEA), those being the 27 EU member states, Iceland, Liechtenstein and Norway. Equivalence is the process of formally recognising that the regulatory or supervisory regime of foreign jurisdiction is equivalent to the home regime and has the benefit of creating a consistent regulatory regime that reduces capital and compliance costs.

Kotsonis Totis_March 2020

Dr. Totis Kotsonis

Partner, Head of State aid and Public Procurement

It would seem unlikely that the EU would reciprocate to the same extent, if at all, at this point

The Treasury's equivalence decisions span a number of financial services areas such as derivatives, reinsurance, credit rating and securities, and Sunak confirmed the government will look into issuing further such decisions in other areas too. To date, the European Commission has issued only one time-limited equivalence decision in relation to clearing houses. This was deemed necessary for a period of 18 months so as so allow EU market participants time to reduce their exposures to UK clearing houses and give EU clearing houses time to build up their own capability.

EU law and trade expert Dr Totis Kotsonis of Pinsent Masons said: "The announcement that the UK will grant unilaterally 'equivalence' to a number of EU and EEA financial services, essentially allowing these services to be offered to UK-based clients without any further regulatory hurdles, is significant in the context of the ongoing UK-EU trade negotiations where the EU has been resisting calls to incorporate any substantive commitments in that regard. Indeed, it would seem unlikely that the EU would reciprocate to the same extent, if at all, at this point."

"The Political Declaration agreed by the EU27 and the UK government committed both sides to cooperation in financial services which, whilst respecting the autonomy of each side, would have included transparency and appropriate consultation in the process of adoption, suspension and withdrawal of equivalence decisions. However, the issue has perhaps predictably become a bargaining chip in the context of the UK-EU trade negotiations and awaits resolution as part of wider trade-offs between the two sides," he said.

On furthering the UK's commitment to 'green' finance, Sunak confirmed that the UK plans to issue its first ever "sovereign green bond" in 2021. The bond will be "the first in a series of new issuances" as the government looks to "fund projects to tackle climate change, finance much-needed infrastructure investment, and create green jobs across this country", the chancellor said.

Sunak also confirmed that it intends to "mandate climate disclosures by large companies and financial institutions across our economy, by 2025" in a move he said would go beyond the recommendations of the global Task Force on Climate-related Financial Disclosures (TCFD).

Kotsonis said: "The chancellor’s statement was noteworthy for its emphasis on measures to tackle climate change concerns. With initiatives such as the issuing of the first ever UK sovereign green bond next year and the intention to mandate climate disclosures by large companies and financial institutions, a world-first, the chancellor is essentially signalling to the world that the UK is serious about taking on a world leadership role in promoting the climate change agenda."

Sunak further announced that the government plans to establish a new 'long-term asset fund' within the next year to encourage UK pension funds to invest in the UK's economic recovery from coronavirus. The chancellor also reiterated the government's intention to maintain the UK's position as "a leading global destination to start, grow and invest in fintech".

In July, the government commissioned an independent review into the UK's fintech industry. Ron Kalifa, former chief executive of Worldpay, is leading the review which is intended to "establish priority areas for industry, policy makers, and regulators to explore in order to support the ongoing success of the UK fintech sector". Areas covered by the review include skills, investment, policy, connectivity and international attractiveness.

New plans to support the UK's payments sector are also expected to be published "shortly", said Sunak, as he also confirmed the government would soon open a consultation on so-called 'stablecoins' to ensure those cryptoassets "meet the same high standards we expect of other payment methods".