East-West Connect's Dmitry Leus Comments on Potential Post-Brexit Strain Upon the Bank of England's Regulatory Arm

The full article can be found at https://new.eutoday.net/news/politics/2017/the-potential-strain-upon-the-bank-of-englands-regulatory-arm-post-brexit

Mr Leus writes: "London's status as the financial hub for the rest of Europe has been in part due to a regulation in the EEA (the European Union plus Iceland, Liechtenstein and Norway) which allows a bank to locate a fully regulated entity on one EU member state and operate across other states without the need for additional local regulation in the other countries. This is commonly called 'passporting'. Brexit will change all of this unless passporting is replicated in any deal cut with the remaining 27 members of the EU. This raises the possibility that the Bank of England's regulatory arm, the Prudential Regulation Authority (PRA), could face additional responsibility to regulate those firms operating in the UK who were, pre-Brexit, covered by passporting."

He added: "The Deputy Governor of the Bank of England, Sam Woods, has been quite outspoken about the strain this will place on the Bank and PRA's ability to regulate the financial sector. Mr Woods said he feared a 'material extra burden' on the PRA if the organisation must police more financial firms post-Brexit."

Mr Leus commented: "It is estimated that around 70 firms rely on passporting to operate in the UK and it is they who will need to be regulated by the PRA if there is no deal to replicate passporting after Brexit."

Mr Leus asked in his article if there a way to avoid this loss of passporting rights remarking that "one option would be for the UK to remain in the single market by joining the EEA and thereby having a similar status to Iceland, Liechtenstein and Norway. But would the UK really do this, given that being part of the EEA means accepting free movement as well as the authority of the European Court of Justice, which the UK leadership is against."

He went on to add that "an alternative to passporting is equivalence. This is where cross-border trading is possible due to countries recognising each other's standards. Back in the 1990s this occurred between the UK and the USA regarding mutual access to derivatives markets. Could equivalence be a possible mechanism for the UK post-Brexit? It is not impossible, given that some EU legislation accepts the principle of equivalence. But the EU legislation on this is not complete. Equivalence in commercial banking and primary insurance are not yet covered by EU legislation. If the equivalence route were to be pursued, the UK would need to have a detailed agreement as a framework for resolving any future disputes as well as what would happen in cases where rules differed between markets."

In conclusion, Mr Leus wrote that: "Until this gets resolved, it seems understandable that the Bank of England would indeed be very concerned about the regulatory strain likely to be placed upon the PRA post-Brexit. It is unlikely to get resolved quickly, partly because the EU insists first on a financial deal, resolution of the Ireland border issue, the rights of EU citizens in the UK and vice versa, before addressing other issues. But it seems clear from the Bank of England's statements that this is an issue which needs to be a priority."

About East-West Connect

East-West Connect is a London-based forum focused on investment risk and opportunity in Central and Eastern Europe. We provide news and analysis about the investment and economic climate of the region. 

East-West Connect was founded by Dmitry Leus, an entrepreneur and banking and financial services professional. He started his career as FOREX specialist at Russia's Lesprombank in the mid-90s. He later became Head of International Settlements of the bank, and in 2000 began running the South-West section of Lesprombank. In 2002, he was appointed Chairman of the Russian Depository Bank. In 2006 he founded Zapadny bank, where he worked as Chairman until late 2013. Since 2014, the e-commerce market of Europe and the UK is of special interest for him and he actively invests in the European and CIS financial sector. In parallel, he works as an expert in business development and helps large corporate companies build effective management and improve the quality of the services provided.