LONDON — Andrew Bailey, the chief executive of the Financial Conduct Authority, has made the case for preserving Britain’s free trade in financial services with the EU in the regulator’s most comprehensive statement on Brexit yet.
However, Bailey — Britain’s most senior financial regulator — argued that free trade of financial services should not necessarily be tied to membership of the European Single Market, which Britain is widely expected to leave in leaving the EU.
Speaking at an event hosted by Reuters at its Canary Wharf headquarters on Thursday morning, Bailey argued for continued cooperation in financial services regulation and supervision between the UK and the EU once Britain leaves the bloc, arguing that a “retreat from international engagement would be a big mistake” for both sides.
“Open markets in financial services, freedom of location and free trade matter a lot and should be preserved,” he told the audience of bankers, financiers, and journalists.
“There is ample evidence that open markets in financial services and free trade can exist safely without common detailed rules and shared regulatory institutions. Consistent outcomes of regulation are what matters,” he continued.
“Is restricting trade is an inevitable or necessary response to Brexit and in the interests of anyone? I hope you will not be surprised to hear that my answer to these is ‘No’.”
Since the vote to leave the European Union last summer, fears have been widespread that trading in financial services in the same manner after Brexit as before will be nigh-on impossible if Britain leaves the single market.
Leaving the single market means Britain losing the financial passport, which is one of the biggest fears of firms with EU bases in the UK.
The passport is an agreement that allows banks with a base in the UK to access customers and financial markets in the (currently) 28-nation EU trading bloc. It includes a system of common financial rules that all countries in the passport network sign up to.
For example, a US or Japanese bank can set up a subsidiary in London and from there operate branches on the continent. If the UK loses the passport, those branches won’t be tethered to a country in the EU single market and therefore be unable to carry out the range of services they might want to.
Consequently, a large majority of banks with bases in the UK are believed to be considering some form of hub on continental Europe once Britain leaves the EU to negate the loss of that passport.
Bailey made clear that he does not necessarily believe this needs to be the case. He said:
“When I hear people say that firms need to re-locate in order to continue to benefit from access to EU financial markets, I start to seriously wonder.
“Does Brexit have to mean abandoning the benefits of free trade and open markets in financial services? It should not.
“Does it require membership of the Single Market to get the benefits of free trade with the EU? No.
“Does Brexit mean abandoning the use of regulatory co-operation to ensure sufficient alignment of standards and outcomes so that open markets can prevail? It should not.”
Bailey also put forward the argument for a transition period — a policy favoured by moderates where Britain slowly adjusts to leaving the EU, rather than falling off a cliff.
“There is a very clear risk, absent a transition period,” Bailey said, that firms would have to put in place their contingency plans without knowing the outcome of negotiations.