Brexit Broadcast – Transitional agreement

Simon Lovegrove: Hello everyone and welcome to our latest Financial Services Brexit video. I am joined today by Jonathan Herbst and Peter Snowdon. Jonathan to start with, what have you been seeing in the market and I also know you have been looking at the Transitional Agreement?

Jonathan Herbst: So in the market as far as the banks are concerned, there’s been all the excitement of getting their applications in and the whole question of whether they should or shouldn’t actually be submitting formally to the PRA at this moment. I mean to summarise where we are at, many of the banks have actually applied, but I think the PRA had a particular reading of their communications just before Easter as to whether that is a good idea or not. I think the formal position is the transitional deal isn’t quite done yet, but I think the hint is that there’s actually going to be a longer period and the expectation is that ultimately the transitional will be agreed and that’s point number 1. Point number 2 in terms of the Transitional Agreement itself is not everything is actually agreed and if you actually look carefully, there’s the so-called white text, for example on choice of jurisdiction, although clearly there are a number of core areas, for example choice of law where are we are pretty much there. Also interesting from the perspective of financial services there is nothing specific on financial services. I suppose that’s logical because what the Agreement effectively means is that it is of standstill and goes to the end of the transition period with all existing rights, all existing law including passporting etc but it doesn’t tell you what comes after maybe that’s obvious but it’s an important point to make.

Simon Lovegrove: Peter, Jonathan just touched on a moment ago about timetables, the differing views between the ECB and the PRA and the FCA.

Peter Snowdon: Yes. I mean, I think as Jonathan alluded to, there’s been a bit of confusion as to where the PRA stood on at getting applications in and certainly we’ve, you know heard in the market that, second-hand obviously that there were sort of mixed messages coming out of the Regulator. I think that’s sort of settled down a bit now. In some ways the ECB position, although it’s caused a bit of a stir in the market is more logical because nothing has been agreed yet and the ECB in one sense is taking the approach well in risk terms until we know that something has been agreed actually you should be planning on things not being agreed and therefore it makes some sense for firms to get on with their applications and get on with their notifications to the ECB and indeed the PRA. So we’ve got a difference of approach between European Regulator and the PRA. The FCA has been and continues to be relatively quiet on this. I mean there are a few comments around and certainly some of our clients have had comments from the Regulator but again that’s understandable because the UK Regulators in one sense are in a fairly difficult position because they are obviously going to be bound by legislation and we haven’t seen a lot of that legislation yet so it’s quite difficult for them to come down firmly in one way or another.

Jonathan Herbst: But clearly the FCA thinks an interim permissions regime if anything will be needed and the PRA to the extent the transitional deal doesn’t go through thinks that can solve it. The issue is at the other end as Peter says which is for the Banks if the ECB doesn’t accept that then interim permissions is very helpful, of course from a UK perspective, it doesn’t answer the European question.

Simon Lovegrove: OK just keeping with the PRA and FCA now we’ve just seen the business plan, what do you expect to see from both Regulators over the next couple of months?

Peter Snowdon: Maybe I’ll start perhaps on the FCA, I mean what we’ve seen in a way and I’m paraphrasing what the FCA said in their annual report, was that they’re clearing the decks for Brexit. So a lot of other initiatives that they had or might have had in other circumstances are being put to one side as they get ready for Brexit. It’s clear that an awful lot of resource is going to go into the Brexit planning that they have to get in place and in a way it’s obvious that that would be the case. So there is a lot of work there that is going to have to go from the FCA into that.

Jonathan Herbst: In terms of the PRA, the FCA and indeed the Treasury in secondary legislation, I don’t think one can overestimate the amount of work there’s going to be. In a sense we haven’t started with the real Brexit work yet. This is the beginning of the detailed application and even if they take the view of just applying everything which sounds conceptually simple, there’s an enormous amount of drafting but I’m also suspicious. I think there’ll be a lot of policy thinking done at the same time. Let’s see what happens.

Peter Snowdon: I do agree with that and I think it’s worth underscoring a point Jonathan makes. You know people talk about just copying it all over and imposing it as domestic legislation. You can’t do that. It’s a lot more complicated than that and there are big debates to be had as to how you do that. Are you going to do it at sort of Parliamentary level as either secondary legislation or even possibly primary legislation or are you going to give powers to the Regulators to create rules.

Jonathan Herbst: Or even as guidance.

Peter Snowdon: Or even as guidance and it’s interesting because I think probably there are those in the industry who’d quite like the Regulators to do that because they feel that the Regulators know what they are doing in day to day terms. But of course in constitutional terms that is quite a challenge for Parliament. There are lots of debates there and it is quite interesting if you follow these discussions in Parliament and in commentary and we are yet to see how this is going to happen. It’s an awful lot of work. Simon Lovegrove: Ok, final question Peter. We’ve recently seen a draft report from ECON concerning equivalence.

Peter Snowdon: Yes, it’s an interesting question. There are two probable answers to that. One is that this is the [European] Parliament trying to help out. The second is slightly more cynically and maybe unfairly that they also would quite like to have a bit more of the action. But if we look at the helping out side of things. I think what they’ve done is identified that that there is a lot of uncertainty in relation to equivalence provisions as we know they are salted around lots of different bits of legislation. There is very great opacity as to how things work. How do you judge whether someone is equivalent and so on. What arrangements are put in place if someone’s judged not to be equivalent and so on and so on and what the ECON is saying is actually if I summarise, I think that they would like to address these issues and introduce a bit more practical guidance so that people actually know how these things are going to operate in practice rather than it being some sort of you know magic activity behind the curtains.

Simon Lovegrove: And a greater role for the European Parliament in the process too?

Peter Snowdon: Yes. A greater role for the European Parliament. I mean as I say there’s been a few sort of more slightly cynical observations about that. But yes, the European Parliament wants a greater role which you know, is perhaps is not unreasonable.

Simon Lovegrove: Ok and as a final question Jonathan, just moving away and looking at the bigger picture. I know you had some thoughts.

Jonathan Herbst: Well I think the biggest theme we’re seeing come through and I think it’s kind of obvious when you think about it is, when you start asking the big question about global business models, it isn’t just about Brexit. It is also about all the business, investment firms and banks do from New York, Singapore and the rest of the world, particularly follow the sun models. So I think this has been very clear in the work we’ve been doing which is you know be careful how you answer the Brexit question because it applies to the rest of your global model. Hence one of the reasons that there is such push back from the industry to any radical change to the way that they run a global model.

Simon Lovegrove: Thanks Jonathan. That concludes this video. Goodbye.