Bailey on Brexit

Andrew Bailey, Chief Executive of the Financial Conduct Authority, gave a lecture last week at the Official Monetary and Financial Institutions Forum on Free Trade in Financial Services Matters

For those with the stamina to be avid Brexit watchers, it pretty much meets the current industry standard of his political counterparts, in being very light on any specific commitments or pragmatic, practical points other than, “To state the blindingly obvious, time is of the essence.”

There are some useful insights into regulatory thinking, interwoven (absolutely not ‘buried’) with some interesting historical insights, leaving plenty of opportunity for reader interpretation.

Mr Bailey displays a detailed knowledge of the liberalisation of trade in the nineteenth and twentieth centuries, although he is at pains to distance himself from the philosopher Santayana’s “those who do not remember the past are doomed to repeat it” or, as it is more colloquially put, that “history is not a version of Groundhog Day”.

The gist of the digression seems to be that the British Government sometimes does odd things, that trade treaties are formed as much by the wishes and intentions of the wider international community as by the principles of those negotiating them, and that since the nineteenth century we have seen the rise of the exportation of services which has different considerations from the export of goods.

Mr Bailey draws out the particular effects of trading blocs, and whether these infringe the principles of non-discrimination and equality in the Most Favoured Nation approach adopted by the World Trade Organization.

Turning to financial services specifically, effective regulation is positioned as essential to the successful functioning of both internal and international financial services markets, engendering the trust that leads to the maximising of cross-border trade opportunities. While regulation can operate restrictively too, understanding the objective of the restriction and the harm it is seeking to prevent, is key.

Mr Bailey’s career has been steeped in international financial services since he joined the Bank in the 80s (as an analyst in developments in international financial markets, including being seconded to the Federal Reserve Bank of New York). He has seen first-hand how the initial disparity in regulatory approach between the retail sector and the wholesale sector has been eliminated over time, through the development of macroprudential thinking and how the “global financial crisis put the final nail into that coffin”.

Through the past few tumultuous decades, the regulator’s thinking has been focussed on financial stability, and Mr Bailey sees us at yet another fork in the road. He attributes the successful navigation of the financial crisis in part to the benefits of open and global markets and the move away from protectionism. These benefits are derived from efficient, effective and well-coordinated regulation – which is perhaps the key take-away from this.

Reactions to Brexit are, in the regulator’s eyes, a threat to that openness and risk harm to everyone, not just the UK.

As counter-measures, Mr Bailey advocates harmonising the ‘patchwork’ of global regulatory standards, through international cooperation, the development of consistent frameworks and the frustration of regulatory arbitrage.

To facilitate this, Mr Bailey is looking for a new relationship with the EU, with the objective of preserving cross-border operating through a clear and sustainable agreement on market access, with non-discrimination and a level playing field at its core. Market access would be predicated on a commonality of rules through an outcomes-based approach.

This is to be achieved through regulators working together on this and in the supervision and enforcement context, perhaps building on the existing regulatory colleges.

Despite some more upbeat references to the opportunities of trade liberalisation for the UK, the speech leaves the strong impression that the FCA didn’t have too much of a problem with the previous system of EU regulation and thought that it could have done a lot worse. The direction of travel in the negotiation of the new arrangements, transitional or long term, would seem likely to be to, as far as possible, replicate the same arrangements only under a new flag.