Brexit’s latest twist: Britain pushes the EU to
increase red tape
The City of London was supposed to have been set free
by Britain’s departure from the EU. That’s not how it’s turning out.
FEBRUARY 2,
2024 3:24 PM CET
BY HANNAH
BRENTON
https://www.politico.eu/article/brexits-latest-twist-its-the-uk-now-pushing-eu-to-increase-red-tape/
LONDON —
Brexit? What Brexit?
In a
reversal of the roles they've been used to playing, Britain is demanding the EU
toughen up rules, worried about the threat of another financial crisis.
It's the
ultimate irony. Britain's departure from the bloc was supposed to mean breaking
loose from Europe's shackles and ushering in an era of light-touch regulation
for the City of London.
But three
years on, it’s British authorities who are lobbying the EU to impose stronger
safeguards on a wobbly part of financial markets — whereas Brussels technocrats
aren’t so sure.
Top U.K.
officials from the Treasury, Bank of England and Financial Conduct Authority
will raise concerns about the EU’s lax approach during a charm offensive this
week in Belgium.
“There are
different feelings on how fast things can move,” said one U.K. official,
granted anonymity to speak freely because discussions between the two sides are
confidential. “There is more impetus on the British side to move and move
quickly lest something go wrong.”
It's a
problem for British watchdogs, including the Bank of England, because they're
powerless to address a vulnerability in the U.K.’s financial system without EU
action, since the risks are stashed in Dublin and Luxembourg.
Now’s the
chance to ram the message home. U.K. authorities will host a reception in
Brussels and send senior staff to a twice-yearly schmoozing event with the
financial industry — known as Eurofi — in Ghent this week, as they try to win
over their EU counterparts.
Dash for cash
A specific
type of investment fund is the cause of the tension. Money market funds provide
quick access to cash for companies and investors, helping oil daily business
life.
But in
times of crisis they have struggled to keep up with intense spikes in demand.
This was seen at the start of the pandemic, when companies wanted their money
back in the “dash for cash” — ultimately forcing central banks to pump money
into the financial system.
The BoE is
particularly exercised because sterling funds came under stress both in the
pandemic and during the bond-market turmoil following former U.K. Prime
Minister Liz Truss’ government’s disastrous mini-budget in 2022 — and it really
doesn't want a repeat.
Money
market funds are an “important vulnerability” for the U.K.’s sprawling
financial system, the BoE said in a December report. Britain's financial
watchdog set out plans that month to require the funds to hold more
easy-to-sell assets to be able to withstand more pressure.
Yet the
U.K. can't go it alone because 90 percent of sterling money market funds are
based in the EU — meaning they fall under the bloc's regulations. And the EU
just doesn’t see the urgency.
Monitoring vulnerabilities
The EU’s
rules for money market funds have “overall successfully passed the test” and
don’t require any legislative fixes, the European Commission said in a report
in July last year.
The EU
framework "comprises robust fund and liquidity rules, ongoing disclosures,
regular stress testing and reporting for a close monitoring by competent
authorities," a Commission spokesperson said.
"It
also identifies certain vulnerabilities in the market for MMFs and areas which
would merit further assessment."
EU
officials relayed that laid-back stance after their U.K. counterparts raised
the issue at an October forum — the first since Brexit — to discuss financial
regulatory issues. With the European election looming in June, Brussels won’t
even consider legislation until at least the end of this year.
Britain has
been trying to apply pressure. As well as raising the issue via Brussels, U.K.
authorities like the BoE are talking directly to the Irish and Luxembourg
watchdogs, although they may have limited scope to act alone. And the U.K. is
pushing for wider international reforms through global regulators like the
Financial Stability Board.
“There will
be pressure directly or indirectly,” said the U.K. official.
Still, the
U.K. can’t force the EU to do anything. And there's some irony for Brussels in
the British predicament.
Lurking risks
Until now,
it's been London's dominance in the clearing of euro derivatives that has been
the major Brexit flashpoint between the two sides when it comes to financial
services.
Brussels
wants to shift euro clearing out of London as it fears it wouldn’t be in
control in a crisis. The U.K. doesn't think it should budge as the EU benefits
too from the scale of the business available in the City.
Now, the
U.K. faces the opposite dilemma. British regulators may not want money market
funds to move over the English Channel, but they're facing a lack of control
over a part of financial markets that gives them cause for concern.
“This is
clearing, the other way round,” said a fund lobbyist. “How do you satisfy
yourself that all possible risk is covered, when you're not in the driving
seat?”
The U.K
government could start demanding EU funds meet a higher bar to be sold in the
U.K. in a few years’ time. But in the meantime, the risks lurk outside their
immediate reach.
Kathryn
Carlson contributed from Brussels.
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