Speech by Andrew Bailey, Chief Executive of the FCA, at the Eurofi Financial Forum, on multilaterialism and global coordination.
Event: Eurofi Financial Forum, Vienna
Delivered: 6th September 2018
Note: this is the speech as drafted and may differ from the delivered version
- It would be a mistake to move away from open financial markets as they are needed to support trade in goods and services.
- A commitment to cross-border cooperation allows for standards to be set domestically where international standards do not exist.
- Some in the EU are suggesting that EU financial activity must take place in the EU, at a time when other countries internationally are removing unnecessary location policies.
It is a great pleasure to be speaking at Eurofi and to comment on the topic of multilateralism and global coordination which is so fundamentally important right now.
I strongly believe that competition and innovation in financial markets, supported by robust regulatory and supervisory standards provide better outcomes for users of financial services, particularly so in wholesale markets. An essential pre-requisite of these outcomes in my view is open financial markets which also support trade in goods and services.
As authorities from around the world we work together to develop and implement standards which are strong but flexible enough to enable competition and innovation. It would have been easy to turn our backs on open markets in the wake of the searing experience of the financial crisis, but to the great credit of everyone involved that did not happen.
Unfortunately, there is regular commentary that this approach is now being challenged. This would be a mistake.
It has always been the case that one jurisdiction cannot constrain the autonomy of another’s domestic regulation (and here I treat the Single Market as one jurisdiction). But it would be a big, and in my view unfortunate, leap to therefore say that we cannot envisage open financial markets which support free trade – and to suggest that we cannot underpin open markets with a common commitment to international standards where they exist. Such a commitment to international standards is an essential part of achieving equivalent outcomes and thereby managing risks which go across borders. But also where international standards do not exist, freedom for jurisdictions to set their own standards domestically can certainly co-exist with international co-operation in a way that enables agreed equivalence of outcomes.
“Where international standards do not exist, freedom for jurisdictions to set their own standards domestically can certainly co-exist with international co-operation in a way that enables agreed equivalence of outcomes”.
Let me give two important examples of where we are balancing these considerations today.
First, on benchmark interest-rate reform. There is no constraint on domestic choices on the alternative and risk-free rate to be chosen for each currency. Different choices have been made for different currencies. But that does not remove the need for, or prevent, strong co-operation to co-ordinate the outcomes based on those choices.
Second, on financial innovation and regulatory ‘sandboxes’: there is no constraint on any domestic choice on the model for sandboxes or what is accepted into them. These are all rightly domestic choices shaped by domestic circumstances and demand. But that should not prevent co-operation to in order to enable cross-border activity where appropriate. To do otherwise would make no sense. That is why we in the FCA set up a Global Financial Innovation Network which will help pool regulatory expertise to support firms in trialling innovative cross-border services and products. And it is why The International Organisation of Securities Commissions (IOSCO) launched a FinTech Network to explore the effective use of regulation in financial technology and automation.
Closer to home, going forward next year, there will be areas where UK authorities will need to closely coordinate with the EU, the US and others whilst each managing our autonomy – and respecting the autonomy of others. To offer just one particular example: The Markets in Financial Instruments Directive (MiFID) II has been calibrated based on UK and EU27 markets combined and it may not make sense to break that down and have different UK and EU transparency rules for the same products.
When I speak to other regulators, I get a clear sense of a common interest to preserve the benefits of collaboration, sharing of information, and to ensuring effective supervision. But there is evidently a debate on this as we think about the post-Brexit situation.
One perspective is the desire to keep access to the Single Market open to third countries, including the UK, on the basis of open markets, equivalent standards and the right of establishment.
“I strongly welcome Commissioner Chris Giancarlo of The U.S. Commodity Futures Trading Commission’s (CFTC) proposals for closer cross border cooperation and a greater use of deference – reliance on comparable overseas rules – where they deliver broadly equivalent outcomes”.
Another is that financial activity involving EU parties should be carried out as far as possible in the EU. But this seems to go against the principle of open markets and free trade, and is unnecessary in view of all the post-crisis work on co-operation and broad alignment of standards.
Moreover, other countries are moving in the direction to remove unnecessary location policies and national treatments. To this end, I strongly welcome Commissioner Chris Giancarlo of The U.S. Commodity Futures Trading Commission’s (CFTC) proposals for closer cross border cooperation and a greater use of deference – reliance on comparable overseas rules – where they deliver broadly equivalent outcomes.
“In Europe, as we will have identical frameworks, there will be a strong case for the UK and the EU to find each other equivalent on ‘day 1’”.
In my view, the real strength of deeper capital markets is access to a global pool of capital to support the growth of companies and economies. Consistent outcomes of regulation are what matters, reinforced by strong regulatory co-operation and co-ordination – which is essential to preserve the strength of the global financial system. In Europe, as we will have identical frameworks, there will be a strong case for the UK and the EU to find each other equivalent on ‘day 1’. And we should now work together to put in place the arrangements to achieve this in practice. By committing to this course, together we can also take a decisive step to head off the risk of transitional cliff edges.
I have previously argued that there are four key elements of such strong regulatory co-ordination: comparability of rules (but not exact mirroring), supervisory co-ordination, exchange of information, and a mechanism to deal with differences.
I see an emphasis on outcomes-based equivalence as fundamentally important to support the balance between autonomy and co-operation and avoid outcomes that will damage the economic well-being and successful financial markets. There has been a lot of debate around the use of the word ‘mutual’ in the context of the Brexit debate. ‘Mutual’ does not involve constraining domestic autonomy: rather, it involves approaches which should deliver broadly equivalent outcomes while respecting the autonomy of jurisdictions. This should facilitate the benefits of open markets, the thing we should all value and work hard to preserve.