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3.94 There were slightly different perspectives from the insurance sector, where many focused on the potential opportunities and risks related to the EU’s approach to Solvency II with non-EU countries. Evidence from Standard Life cautioned that an international approach to the regime risked being overtaken by global developments;121 the International Underwriting Association (IUA) noted the benefits of an EU approach in negotiating across the continent and the potential usefulness of an equivalence approach, even if it may currently be creating uncertainty;122 while the British Insurance Brokers’ Association (BIBA) called for a return to ‘individual nations managing their own risks in trading with Third Countries’.
BVCA, submission of evidence, p12.
CLLS, submission of evidence, pp15-16.
Sharon Bowles MEP, submission of evidence, p15.
Standard Life, submission of evidence, p6.
IUA, submission of evidence, p2.
64 Review of the Balance of Competences between the United Kingdom and the European Union:
The Single Market: Financial Services and the Free Movement of Capital
3.95 The Commission has consistently highlighted that jurisdictions have implemented international regulatory guidelines in different ways in order to accommodate local specificities. One consequence is that this can create international competitive distortions and scope for regulatory arbitrage. To overcome the problem of not having fully harmonised national regimes, the Commission has adopted Third Country Equivalence Assessments as a key tool to assess whether Third Country regulation and supervision are equivalent to those that exist in the EU. If a Third Country is deemed equivalent, financial operators are able to operate in the EU without being subject to the full set of EU rules.
However if a Third Country is not deemed equivalent, financial operators have to comply strictly with EU requirements.
3.96 Generally speaking, EU Third Country Equivalence Assessments take the form of either mutual recognition or direct compliance. The former is adopted when there are areas of strong international regulatory convergence, while the latter approach is adopted when financial operators provide cross-border services. The Commission has also promoted the concept that equivalence should be considered by a common EU assessment, rather than individual Member State assessments. As a result, these assessments are carried out by the ESAs. The Financial Services Practitioners Panel acknowledged that, ‘there is a need to ensure that firms trading in EU markets are subject to high regulatory standards,’ but they also went on to emphasise that, ‘solutions must be found to ensure that those firms are not barred or discouraged from trading and interacting with UK firms’.
Crown Dependencies and Third Country Issues The financial services sectors in Jersey, Guernsey and the Isle of Man – the three Crown Dependencies – are part of the Sterling Zone and the UK’s payment and clearing system, although they have their own independent regulators and regulatory systems. As they are not members of the EU, they are Third Countries for the purposes of EU financial services legislation and the UK is responsible for their external relations. In light of this, the EU’s approach to Third Countries regimes is of particular importance to the Crown Dependencies, especially as a large proportion of inward investment is sourced from outside the EU.
Joint evidence from the Crown Dependencies noted that, although in the past Member States have largely determined how to permit Third Countries’ firms access to their markets, the EU is increasingly moving into the ‘shared competence’ space of trade and investment relations with Third Countries. In considering the future balance and exercise of competences between the EU and its Member States, the Crown Dependencies highlighted the importance of an EU Third Country policy that is aligned with international standards, is evidence-based, maintains investor confidence and is both transparent and consistent.
Their specific recommendations include that: impact assessments should more systematically expose any inconsistency between EU and international standards;
the EU should use existing assessments by international institutions of Third Countries’ compliance with international standards, and where assessments by international bodies are not available, should refer to existing peer review processes; where EU assessments of equivalence are still deemed necessary, the UK should have responsibility for determining equivalence in its dependent territories as the ‘Member State of Reference’; and in the event of delays in EU equivalence decisions, the UK should be able to establish or extend transitional measures for access to its own market.
Chapter 3: Impact on the National Interest 65Free Trade Agreements and the Transatlantic Trade and Investment Partnership
3.97 Free Trade Agreements (FTAs) are another key way, alongside Third Country regimes, whereby the EU determines the terms on which Member States can trade in financial services with non-EU countries, as the EU has exclusive competence to negotiate trade agreements with provisions on services.123
3.98 FTAs were covered in Review of the Balance of Competences between the UK and the EU: Trade and Investment. This sets out the extent of EU Trade Agreements (see Figure 1.2 in particular) and also considered the advantages and disadvantages of alternative options to the EU exercising competence in negotiating FTAs, notably in Chapter Four of that report. A separate study by the Centre for Economic Policy Research (CEPR) considered in further detail the qualitative and quantitative advantages of the existing approach and the alternatives.
3.99 However, a number of submissions to this report drew attention to the importance of FTAs in supporting the ability of financial services firms headquartered in the EU to trade on a level-playing field with Third Countries. Many stakeholders emphasised that the UK can currently take advantage of the EU representing its interests in negotiations and wielding greater power compared to the influence the UK would have if it was negotiating bilaterally.124 For instance, evidence from Graham Bishop on behalf of the European Movement (UK) noted that the, ‘Benefits of the size of the EU Single Market as a negotiating bloc [...] should not be underestimated’.
3.100 Attention was drawn in evidence to the importance of the proposed FTA between the EU and the US: the Transatlantic Trade and Investment Partnership (TTIP).125 The BBA noted the benefits of the EU negotiating as a single more powerful bloc with another market of such significance.126 Respondents also commended the joint approach by the EU and UK in seeking to include financial regulation as a core element in the agreement, on the basis that it would help to mitigate risks of fragmentation and extraterritoriality.127 CEPR has estimated that an ambitious deal on TTIP could increase the UK’s total financial and insurance services output by 1-2% per year and exports by 3-4% per year.128 C. Development of the Banking Union and EU-Level Supervision
3.101 The evolution of the euro area, especially since the financial crisis, has introduced an additional dimension to the financial services regulatory framework. While the development of the banking union and the European System of Financial Supervision were generally welcomed by stakeholders as important responses to the crisis, there were also strong views that the UK, other Member States and the EU institutions should ensure that steps to support the stability of the euro area do not impair the integrity of the Single Market or act against the UK’s national interest.
The sole exception to the EU’s exclusive competence over trade in services is in the field of transport, which is an area of shared competence.
See: BBA, submission of evidence, p7; Sharon Bowles MEP, submission of evidence, p2; Graham Bishop on behalf of the European Movement (UK), submission of evidence, p3; Citi, submission of evidence, p2; HSBC, submission of evidence, p6; IRSG, submission of evidence, p13; the Law Societies, submission of evidence, pp3-4; and JP Morgan, submission of evidence, p2.
See: Citi, submission of evidence, p2; and JP Morgan, submission of evidence, p2.
BBA, submission of evidence, p7.
See: CBI, submission of evidence, p25; and IRSG, submission of evidence, p13.
For further details please see: www.gov.uk/government/uploads/system/uploads/attachment_data/file/198115/ bis-13-869-economic-impact-on-uk-of-tranatlantic-trade-and-investment-partnership-between-eu-and-us.pdf, accessed June 2014.
66 Review of the Balance of Competences between the United Kingdom and the European Union:
The Single Market: Financial Services and the Free Movement of Capital Banking Union
3.102 As set out in paragraph 1.15, the recent euro area crisis has emphasised that the monetary union requires a banking union due to the intimate interconnection between currency stability and the stability of banks within a currency union.129 Although many aspects of the banking union have yet to be determined and the UK Government has been clear that it will not participate, it is evident that this deepening integration will have a significant effect on the Single Market and the UK’s relationship with the EU in financial services as well as in other fields. In response to these developments, the Commission has emphasised the importance of preserving the Single Market in a 2012 communication: ‘The creation of the banking union must not compromise the unity and integrity of the Single Market which remains one of the greatest achievements of European integration’.130
3.103 There was broad consensus in evidence that the banking union is a necessary and, in many ways, logical consequence of currency union.131 Some argued that the UK, as the largest financial centre in the EU, could have a lot to gain from financial stability across the Single Market, although the benefits from euro area stability extend globally.132 Others highlighted that the risks to the UK of being outside the banking union are smaller than the risks to those Member States that have joined the banking union.133
3.104 There was, however, a large degree of unease about the longer term impact of the banking union on the UK’s interest in financial services and the Single Market more broadly. Although non-participating members of the banking union, including the UK, have secured a measure of protection against the risk that the members of the banking union ignore the interests of the Single Market, there was concern about the sustainability of such an approach in the future.134 A number of respondents called for the UK and EU institutions to protect the integrity of the Single Market and ensure the pursuit of interests of those in the euro area and the banking union are not at the expense of those that are not.135
3.105 Evidence from Barclays noted that, ‘The Banking Union does present an existential challenge to the UK, as there is the potential for diminished opportunity in the EU rule making process and a general marginalisation from the centre of influence’. Other stakeholders highlighted that this includes the risks of divergent views between ‘euro ins’ and ‘euro outs’ or caucusing by Member States participating in the banking union, and concerns that the technical rules developed by the EBA could be dominated by HMG, Review of the Balance of Competences between the UK and the EU: Economic and Monetary Policy, published in Semester Four. This will consider further the implications for the UK of closer integration of the euro area.
Communication from the Commission to the European Parliament and the Council, A Roadmap towards a Banking Union, September 2012, p4.
See: IRSG, submission of evidence, p18; Nomura, submission of evidence, p2; Barclays, submission of evidence, pp3-4; and the FCA Practitioners Panel, p10.
Sharon Bowles MEP, submission of evidence, pp7 and 24.
Unattributed member of the public, submission of evidence, p3.
See paragraph 1.17 and footnote 17 for detail on safeguards secured relating to the Single Supervisory Mechanism and the Single Resolution Mechanism.
See: Bar Council, submission of evidence, p10; BBA, submission of evidence, p15; Sharon Bowles MEP,
the views of the ECB, as the supervisor of the banking union.136 Evidence from Fresh Start emphasised the possible consequences of such developments, in that ‘The UK could potentially be forced to accept new rules designed for and written by the eurozone countries’.
3.106 Evidence from the BBA elaborated on these concerns and possible steps to mitigate risks:
It is evident... that Banking Union will fundamentally alter the way the EU operates and there is a risk that there will be a divergence of interests between the ‘ins’ and the ‘outs’ and a consequential reduction in the UK’s influence or attractiveness for Eurozone business. It is vital that the European Commission acts to protect the Single Market to ensure the Eurozone does not become a market within a market. The safeguards negotiated to the EBA decision-making process are very important in this regard but must be complemented by an increase in UK engagement in the policy making process to ensure UK influence is maintained.
3.107 In his evidence, Lord Flight noted that, even with changes to the EBA voting structure and good cooperation between the Bank of England and the ECB, there remain risks that, if more EU members join the euro, the UK could find itself isolated and ‘forced to adopt ECB regulation [...] which would be wholly inappropriate given that the size of the banking industry which the Bank of England/PRA regulates is of similar size to that of the Eurozone, for which the ECB is responsible’.