Good morning Ladies and Gentlemen,
It is a pleasure to be here in London for the second day of the City Week 2018. Thank you for the invitation. I have just arrived this morning from the United States. As usual when I am across the Atlantic, I took every occasion to highlight the importance of keeping up our cooperation on financial supervision and regulation. With time, this may also become a familiar message in my UK speeches.
Today, many things are changing and uncertain in the relationship between the EU and the UK. So in my speech I would like to focus on something which is not in doubt: the EU is the most open major market for financial services in the world. Free movement of capital is grounded in the founding treaty of the EU. As Vice-President of the European Commission notably in charge of financial services, my job is to promote and safeguard this freedom.
So today I will start by giving you a snapshot of our work to break down barriers and further integrate the EU single market for capital. And I will then turn to how we can manage the fact that the UK has decided to withdraw from it.
Ladies and Gentlemen,
We are working full speed to deepen and integrate capital markets across the EU, as part of our flagship project, the Capital Markets Union. For example, we have made it cheaper and simpler to raise capital on public markets with our new Prospectus Regulation. And we have agreed on a new framework for Simple, Transparent and Standardised securitisation.
Other proposals are still waiting to be agreed. Our proposal for a Pan-European Personal Pensions Product would help to put to more productive use savings that currently lie on low-interest rate accounts.
And in last month's Fintech Action Plan, we set out concrete steps for a more innovative and competitive European financial industry. One example is regulatory sandboxes, where the European Supervisory Authorities are already working on collecting best practices. I have had good exchanges with Andrew Bailey and the Financial Conduct Authority on this.
Let me also mention our intensive work on sustainable and green finance, which I am happy to see that you are discussing later today. There is no doubt that the financial sector needs to throw its full weight behind the fight against climate change. We want to play a leading role on this, and we will present concrete proposals next month. I appreciate the close cooperation with Mark Carney, including in his capacity as chair of the Financial Services Board in this area.
Ladies and Gentlemen,
For the Capital Markets Union, our goal is to have the building blocks in place by 2019, ahead of the next European elections. This will also help our companies to better cope with the departure of Europe's largest financial centre from the single market.
This brings me to Brexit. While the negotiations are underway, our number one priority is to manage the risks and uncertainty that emanate from this change. And I see two types of risks:
The first risk is linked to the remaining uncertainty on the withdrawal agreement. We have reached an agreement on a joint legal text that covers large parts of the future withdrawal agreement, including a transition period until 31 December 2020. But important negotiation issues still remain to be dealt with before the agreement can be finalised, such as the Irish border and the governance of the withdrawal agreement. As Vice President in charge of financial stability, my message to all parties –firms and supervisors – is that they need to continue their work to prepare for all scenarios.
The Commission is assisting where we can. The notices we published help the industry identify the foreseeable consequences of losing the financial passport. But at the end of the day, it is for the companies concerned to identify concretely how Brexit will impact their business models.
Together with supervisors, we are also closely monitoring markets to make sure that we avoid major disruption on the day of Brexit. Our current discussions confirm that companies can alleviate the main risks by repapering contracts and adapting operational models. I will be discussing these issues later today with Philip Hammond and Mark Carney.
The second risk is linked to our future relationship with the United Kingdom. Last month, the EU27 set out their negotiation guidelines for an overall understanding of the framework for the future relationship. So what would this mean for financial regulation?
Up until now, the UK and the other EU Member States have managed risks jointly by setting common rules. And the European Court of Justice has guaranteed that they are enforced against operators from all Member States. As a result, countries are willing to accept that operators from across the EU export financial services – and also risks – into their territory, without supervising those operators themselves.
With Brexit, the UK will move away from this system. As a consequence, each side will have to set and implement its own rules to protect investors and ensure financial stability. In the words of Chancellor Hammond, "neither side can be a simple rule taker".
But the EU has a long history of relying on the regulation and supervision of third countries, provided they achieve the same results as our own. We call this equivalence. As of today, we have over 200 equivalence decisions benefitting over 30 non-EU jurisdictions. No one else has a more open, comprehensive and structured framework of regulatory reliance on third countries.
As an example, let me use the equivalence decisions granted under EMIR, the European Market Infrastructure Regulation, the EU's framework for derivatives clearing: with equivalence, a central counterparty complying with the rules of a third country can be allowed to provide services to clearing members or trading venues established within the EU. Currently, we have extended this equivalence to central counterparties in 15 non-EU jurisdictions. This includes the US, where this decision has confirmed our close cooperation with US authorities, with the US in turn relying on EU rules.
Our risk-based approach and proportionate application of equivalence means that it can work for third countries with different levels of interaction with the EU financial system. The EU27 Member States recently recognised this in a statement when discussing the future relationship with the UK. They also reiterated their support to build on and further improve equivalence. And that is what we are currently doing.
Last June, we proposed targeted reviews to the supervision of central counterparties. CCPs are special, due to their systemic nature. The new proposal would differentiate the treatment of the most systemic CCPs from the less significant players. And there may be cases for individual CCPs where - as a last resort - we need to go beyond equivalence.
Investment firms pose yet another specific and systemic set of risks. So when we proposed in December to make EU prudential rules for them more proportionate, we also proposed to make the equivalence test more proportionate and risk-sensitive. This would involve a more detailed and granular assessment for more important third countries, including on supervisory convergence. Still, ours are among the most open rules for third country firms globally.
In spite of these improvements, there are some clear limits to equivalence. First, equivalence decisions are and will remain unilateral and discretionary EU acts. Even in trade agreements, governments do not give up power over their core responsibility to protect financial stability. This is why there are prudential carve-outs in such deals.
Second, equivalence rules do not cover all parts of the financial sector.
And third, equivalence is only possible if there is a close convergence of rules and supervision. If the EU and a third country should happen to go different ways, the conditions for equivalence would fall. This means that equivalence may be changed or – as a last resort - withdrawn.
To make this less likely to occur, supervisors need to work together. Today, European supervisors sit in supervisory colleges with their peers from around the globe to supervise cross-border firms. And the EU has a close network of regulatory dialogues with a number of jurisdictions around the world, to find mutually acceptable solutions for cross border issues. The closer our relationship with third countries, the more intensive and regular are our dialogues with them.
Last year, we proposed a review of the functioning of the European Supervisory Authorities. It aims to clarify the role of supervisors in the equivalence processes, to reflect their important role of underpinning equivalence in all sectors. For example, we proposed that they would assume greater responsibility for monitoring the situation in equivalent third countries.
To sum up: equivalence is not perfect, neither for firms nor for supervisors. But one should not make the perfect be the enemy of good. Equivalence has proven to be a pragmatic solution that works in many different circumstances, and it can work for the UK after Brexit as well.
Ladies and Gentlemen,
Brexit is posing many challenges. For the financial sector, the Commission's first priority is to safeguard financial stability and ensure investor protection. It is my duty to encourage you to take steps to prepare for all scenarios. I am convinced that companies from the UK and the EU27 have the capacity to manage the risks and uncertainty.