Ed Sibley of Central Bank of Ireland on Impact of Brexit

Mr. Sibley welcomed the recent announcement on transitional arrangements for Brexit and emphasized that the arrangements are still, ultimately, dependent on a political agreement on the terms of the UK's withdrawal from the EU. The different incentives and backstops in place in the UK compared to the EU27, should the transitional arrangements not be ratified, result in the UK and EU27 regulatory authorities having to take somewhat different approaches. Therefore, "our approach has to recognize that it is still plausible that there will be a 'hard Brexit' less than year from now. This approach is shared by our colleagues across Europe. As Dr. Andreas Dombret of the Bundesbank recently remarked in a speech here in Dublin, there is 'no alternative to timely preparation, and to preparing for the worst-case scenario of a hard Brexit.' " He also highlighted that the likely loss of passporting rights between the UK and EU27 presents a material risk for Irish firms that depend on a European passport for the cross-border provision of financial services into the UK; this may affect competition and product availability for sectors in Ireland, with inevitable knock-on implications for consumers. In this context, he outlined the impact of Brexit on banks, insurance firms, and asset managers.

With respect to the Irish central bank's approach to Brexit, Mr. Sibley said that it is "one of our highest priorities and involves teams working across every area of the Central Bank. ... We are also having to now de-prioritise and defer other less critical work to accommodate our work on Brexit." Ireland is active internationally to ensure that the risk of divergence between EU jurisdictions in how they handle relocations from the UK is mitigated. To address the concern of regulatory divergences and the risk of regulator arbitrage between EU member states, the Central Bank has long been engaging closely with ECB, across the Single Supervisory Mechanism (SSM) and ESAs, to agree Europe-wide approaches to the key policy and supervisory issues, stances, and decisions that have arisen from Brexit. For example, the Bank worked closely and actively, as part of the SSM, to develop a set of guidelines on this matter. ECB's stance is reflected in comments by Sabine Lautenschläger of the ECB's Executive Board when she stated that "the euro entity should not be an empty shell where the credit risk stays in the euro area, and all of the market risks are booked and governed and managed outside of the euro area." The result is that much of the heat is now gone out of the regulatory arbitrage issue. In the short-term, the UK government is working to integrate the current body of EU financial services law into domestic UK law. In the medium-to-longer-term, however, the position is less certain, he said, referring to the not-yet-final withdrawal agreement. As such, a risk of material divergence between the EU and UK regulatory frameworks is one which must occupy some time as part of the wider Brexit preparations.

Divergence in the future might be problematic, as access to EU markets for financial services is based on the concept of equivalence, or the idea that the firms seeking access to the Single Market from outside the EU have broadly comparable regulatory requirements as those present in the EU. A materially divergent future UK regime would place any relationship based on equivalence in doubt, especially as equivalence assessments require an update periodically and there is no guarantee of the outcome of future assessments. This is clearly less than ideal in terms of building a long-term, mutually-beneficial framework of access between UK and EU financial markets. From regulatory perspective, it is desirable, given the size and role of London as a financial center, that some form of sustainable link between the EU and the UK is found. Additionally, following Brexit, there will be a loss of experience and expertise when UK regulators are no longer sitting at the table; this is something that "we need to be mindful of, particularly in Ireland." "London's role as the pre-eminent financial center in Europe results in more than a hub for trading and finance, but also a hub for the regulation of those activities. The loss of this voice is to be mourned. It is important that the EU27 tries to fill any gaps in regulatory expertise where possible."

Related Link: Speech

Keywords: Europe, Ireland, Banking, Insurance, Securities, Brexit, Passporting Regime, Withdrawal Agreement, Regulatory Arbitrage, BIS, Central Bank of Ireland