EBA calls for 'harmonious' application of European financial regulation post-Brexit

In a detailed opinion document (69 page / 747KB PDF), the EBA said the overarching principle is that the existing legal and regulatory framework should be applied in a “consistent and harmonious way” while avoiding competition on regulatory or supervisory standards.

Authorities should avoid imposing an unnecessary regulatory burden on firms, while also maintaining existing regulatory standards, and cooperation and coordination between supervisory authorities and resolution authorities was deemed important now and in the future.

The EBA focused on the 18 months until the UK is scheduled to leave the EU, at the end of March 2019. It said it issued the opinion in response to “this unprecedented situation”, and to address regulatory and supervisory arbitrage risks arising from an increase in requests from entities wanting to relocate to the EU.

“It's the latest warning shot from Europe to tell each of the competent authorities to apply the law properly and not make a land grab or make it a race to the bottom for regulatory standards,” said financial regulation expert Elizabeth Budd of Pinsent Masons, the law firm behind Out-Law.com.

Budd said not all EU jurisdictions have implemented financial regulation with the same rigour, and the EBA opinion was a reminder to some that they should take appropriate steps when authorising new entities relocating their operations ahead of Brexit.

“It's a case of saying 'we've created a level playing field and we expect everyone to play in the same way',” Budd said.

Although the opinion is addressed to regulatory authorities in the EU and European Economic Area (EEA), it is also designed to provide practical recommendations to a variety of financial services firms to help them respond to challenges arising from Brexit.

The EBA said it was assuming the UK would become a “third country” after Brexit, although it acknowledged the uncertainty in the negotiations process and added that economic and financial integration between the UK and EU member states “will be significantly greater than with any other third country”.

The opinion also noted that Brexit could have an impact on ongoing reforms to resolution planning for the financial sector, especially in building loss capacity. The EBA said the UK played a major role in resolution planning, with English law governing the issuance of a significant amount of liabilities calculated as part of a bank's minimum capital requirements.

According to the EBA, resolution authorities such as central banks needed to consider the extent to which financial institutions rely on financial market infrastructure and shared services based in the UK, to make sure they would still be able to maintain operational continuity after Brexit. 

The opinion echoes calls made recently by the chair of the UK's Financial Conduct Authority Andrew Bailey. Bailey told a London conference earlier this month that regulatory bodies should cooperate closely to ensure continuity of service once Brexit had taken place.