Opening the World

As the man who has been brave enough to accept the role of FCA Chief Executive, Nikhil Rathi will occupy the hotseat at the most interesting and testing of times. It would not be too great an exaggeration to say that the future of this country’s financial services industry lies largely in his hands. Let us hope that he is broad shouldered and thick skinned. But the key question is which way should he turn.

Some will argue that his objective should be to construct a regime as similar as possible to the status quo ante. A few might even go so far as to promote general and indefinite dynamic alignment, following wherever the EU cares to lead. Others will be less keen to keep a hold of nurse and be ready to strike out into the wider world, to engage the growth economies of Asia and elsewhere.

Importantly, while ensuring the FCA retains its non-political credentials, our new man at the helm will have to resuscitate his Treasury connections to be at the very heart of the legislative redesign. Work is urgently needed to rationalise the regulatory perimeter, the legal boundary that controls where the regulator must and must not tread. But more importantly yet, global market access needs radical rethinking – an area where the UK can and should lead the world.

As government documents go, one of the least conspicuous in the class of 2020 is HM Treasury’s consultation on the Overseas Funds Regime. Published in March, the document is widely seen as deservedly ignored, dealing as it does with the obscure subject of which overseas funds should be allowed to promote themselves to British consumers. After all, provided sensible decisions are made, who cares? First, consumers should care, because they should expect to be permitted to see what is on offer from across the globe. Our own funds industry may be world-class but there are others who offer some excellent investment products too. Secondly, the UK funds industry should care a whole lot – after all this is direct competition for them, just at a time when they are losing broad access to EU markets.

But the point, of course, is reciprocity. HMT’s approach to equivalence is masterful, primarily based on a substantive FCA assessment of each overseas regime, but with HMT retaining control of the ultimate, country by country, fund class by fund class decision, so facilitating political negotiation where required. Such equivalence will, no doubt, be offered widely to those with effective consumer protection, including those nations of the EU where supervision and enforcement are properly exerted. All this takes the existing equivalence concept and both deploys it widely around the world and reflects it back onto its now-sceptical inventors.

Important as investment funds may be – very much more so than generally appreciated – they comprise only one part of the spectrum of financial services. What is needed, most urgently now, is a coherent approach to access for all financial services, not just for funds, not just between the UK and the EU, but covering every sector right around the world.

If equivalence can be deployed beyond Europe, so surely can financial services passports. Just as HMT proposes for funds, this should be evaluated and provided on a sector by sector basis, enabling banking passporting to be determined separately from insurance passporting and separately again from investment management passporting. If this has worked adequately across the EU for a couple of decades, why not with other countries with equivalent regulatory regimes? And with reciprocity too. Why would this work? Precisely because, where hitherto we have been obliged to accept passported access to the UK by all EU jurisdictions, whether or not we have confidence in the effectiveness of their consumer protection efforts, passporting based on true equivalence of outcome will be determined by the extent of the protection the home jurisdiction provides, according to our own evaluation, to UK consumers.

Not only should such an approach result in valuable and extensive market access for UK financial services across the globe, but it should also provide a powerful incentive to other nations to adopt sound and effectively supervised regulation and consumer protection. In marked contrast to the EU’s protectionist approach, UK leadership of financial services worldwide could be founded on structuring and offering equivalence assessments and passporting. Admitting to fathering regulation a few decades ago, we can advocate proportionate standards around a world in which we promote free trade to all ready to heed the call.


Howard Flight and Oliver Lodge

July 2020

Lord Flight is a former Conservative Member of Parliament 1997-2005 and Shadow Treasury Minister 1999-2004.

Oliver Lodge is Director of OWL Regulatory Consulting, the adviser to the investment industry on matters of regulation. OWL Regulatory Consulting


Originally published by Thomson Reuters © Thomson Reuters

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