26 March 2021

FT: UK and EU begin diverging on financial regulation after Brexit

The UK and EU have already begun to diverge in the way they oversee financial markets as hopes the two will reach a broad agreement on supervisory “equivalence” in the wake of Brexit fades. Britain has outlined tweaks to areas including the rules surrounding equity, fixed income and commodities trading just months after the end of the Brexit transition period on December 31.

The subtle rule changes strike at the contrasting philosophies between the EU and UK on how markets should be regulated. Among the potential changes, the UK plans to scrap caps on the amount of trading done in dark pools, private venues where investors can trade shares without signalling their plans to the rest of the market in advance. It is also weighing changes to how much information is provided publicly both before and after the completion of trades in the stock and bond market, and to remove limits on the amount of commodities contracts traders can hold.

The EU’s priority is to develop a more harmonised internal capital market. By contrast UK politicians view Brexit as the chance to return to restore powers and discretion to regulators and exchanges, lost by layers of detailed and prescriptive EU rulemaking. UK politicians want to give watchdogs greater leeway to write technical policy; exchanges and trading venues may also have greater freedoms in policing their users and products, according to a Lords Committee reviewing the future of UK-EU relations.

“The UK was always an outlier in Europe,” said Kay Swinburne, vice-chair of financial services at KPMG and a former member of the European parliament. Swinburne drew a comparison with the US system: “In the US, self-regulatory organisations take on a lot more responsibility rather than relying on the regulator. The EU has never believed a financial market infrastructure is suitable to be self-regulated,” she added. Alignment between Britain and the EU is largely dependent on the EU recognising the UK’s standards as “equivalent”. With the UK looking to diverge, the EU has approved only two temporary permits, which grant UK institutions more direct access to customers in the bloc...

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