Andreas Dombret of Deutsche Bundesbank spoke at the AIMA Global Policy and Regulatory Forum in Dublin. He looked at the estimated extent of fragmentation in regulation of financial services after Brexit and how to address this issue. Dr. Dombret emphasized that fragmentation should not lead to competition through lax regulation or supervision. He opines that, for the financial services sector, "a far-reaching free trade agreement is rather unlikely, given the UK's aspired exit from the single market and the customs union." Thus, firms and supervisors must deliver on a transition agreement, pragmatic supervisory cooperation, and managerial innovation.
He added that he is skeptical about the approach via mutual recognition or about similar approaches based on regulatory harmonization through technical committees and independent arbitration mechanisms. Approaches of this kind could undermine the ability of jurisdictions to set their own rules and the ability to safeguard financial stability. The options that remain on the table are a "no deal" scenario or one with quite limited freedoms for financial services, as in the case of Comprehensive Economic and Trade Agreement between Canada and EU (CETA). First, the "no deal" scenario would mean that the EU and the UK would trade under rules set by the World Trade Organization—where services sectors are only thinly covered. Service providers would then have to apply for comprehensive licenses in both jurisdictions and have all the necessary elements of a fully functioning bank ready in both places. Second, even a CETA-like deal would most likely not mean far-ranging freedoms to provide financial services in the respective foreign jurisdiction.
Regarding the transition phase, he said: "A transitional deal between the UK and the EU was agreed yesterday on negotiators' level. During the implementation phase, which is to last until end 2020, EU rules would continue to apply in the UK and the exact terms of the future partnership shall be worked out. ...Many issues are still to be discussed and the transitional period is still not fully guaranteed." He added, with the financial sector firms relocating their business between London on the one hand and Frankfurt, Dublin, and other cities on the other hand, close supervisory cooperation becomes even more important, especially over the coming years when we have to break new ground in supervision. The cooperation between the EU and the UK authorities will have to be put on a new foundation. Information exchange will need to be ensured, along with thinking about how to reduce unnecessary burdens from double licensing. "Whatever political decision is taken, bank supervisors will not only do all they can to make the transition to a new regime as smooth as possible; they will also, in the long run, try to reduce unnecessary inefficiencies where possible."
Emphasizing the importance of timely preparation, he stated that banks must begin implementing their plans and submitting their license applications no later than at the end of the second quarter of 2018. Otherwise, it will be very difficult to prevent a cliff edge. Finally, with respect to the PRA proposal for a post-Brexit supervisory approach, which was published in December 2017, Dr. Dombret said: "I very much appreciate the spirit behind this approach. It reflects a solution-oriented, pragmatic, yet stability-oriented stance. In the same vein, the SSM [Single Supervisory Mechanism] has developed quite pragmatic, cooperative policy stances on many of the relevant issues. I am confident that this cooperative style can make an important contribution toward a smooth transition."
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