The UK’s financial watchdog has told banks it is sanguine about what model they use as they move business to the EU after Brexit, a stance in contrast to the approach from European regulators. In a letter to chief executives across the City of London, Andrew Bailey, the head of the Financial Conduct Authority, said the regulator was “open to a broad range” of arrangements on how to book risk and profit, provided they were properly overseen.
The European Central Bank has taken a much stricter line. But the FCA warned that boards had to ensure any harm from post-Brexit arrangements was mitigated and that firms expanding EU operations had to do so in a way that still allowed the FCA to properly oversee any UK business.
What to do about so-called booking arrangements once the UK leaves the EU has become an urgent issue as the chances of a no-deal Brexit rise. Philip Hammond, the UK chancellor, warned City bosses last month that it was important to prevent a widespread shift of regulatory capital across the Channel.
For its part, the industry fears Brexit will fragment European financial markets, forcing banks to split up pools of capital that they have concentrated in London. Brexit means they will lose the ability to “passport”, which enables them to base themselves in one EU country and sell their products and services across the bloc, without the need to trap capital or for separate regulatory oversight.
“We are aware that some authorities elsewhere in Europe have set out specific requirements as regards business models. We are open to a broad range of legal entity structures or booking models,” said Mr Bailey’s letter, dated August 8. “This includes those making use of back-to-back and remote booking, providing their associated conduct risks are effectively controlled and managed.”
Simon Gleeson, a regulatory partner at Clifford Chance, said the tone was striking. “It’s saying: we’re open and tolerant,” he said. “There are a number of European authorities out there that had a strategy based on the widespread relocation of business and are now having to rethink that.” The ECB, meanwhile, has consistently warned against using “back-to-back” as a solution to losing passporting.
Back-to-back is when products are sold by an entity in the EU before the risk is transferred to the UK via an internal trade. It is just one of several issues where regulators on either side of the Channel are clashing, leaving firms in a quandary. On one level, the FCA letter reiterates existing practice, according to Michael Raffan, a financial-services partner at Freshfields Bruckhaus Deringer. “This will provide a degree of comfort for firms but is only half the story as they will also need to comply with requirements of the local regulator such as the ECB, BaFin [in Germany] or [France’s] AMF,” he said.