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Substance requirements for financial firms moving out from the UK

In the run-up to Brexit, UK-based financial firms are considering how to organize their operations across the future divide between the UK and EU27. T





The opening remarks of the two speakers showed agreement on the broad areas in which substance requirements focus, namely:

  • Local risk management
  • Local staff
  • Local operational management
  • Local resources and booking

Overall, whereas there was also the common view that agreeing the criteria defining substantial subsidiary presence in the host jurisdiction will be challenging, the two speakers offered somewhat different perspectives on the issue.

First, Gerry Cross stressed that, despite the difficulties, requirements will be pinned out through a holistic approach and an iterative process, tackling issues on a case-by-case basis rather than conceptually. Essentially, he called for a balanced approach between rigor and feasibility that already is bearing fruits and will achieve further progress in the future. Mr. Cross also underlined that, aligning the legal entity in the host country with the true underlying activity is not a trivial issue for regulators but a key ingredient in ensuring financial stability.

Simon Gleeson likened the task of defining substance requirements to aiming at a fast-moving target, given the continuous change in the financial industry. He remarked that the topic is often discussed with the wrong premise: it makes little sense to speak of one entity and one location in the financial industry model. Put another way, there is no “it” and “there” for instance when talking about risk management and internal models. Therefore, defining local is complex and regulators will have to answer questions about what they hope to achieve in setting a specific requirement.

The questions and answers section was dominated by a discussion of the impact the Brexit negotiations will have in setting the requirements and the spillover into the future regulatory environment, financial integration and stability. Some more specific, technical questions were also posed.

To start with, the stance of regulators was contrasted to the dynamics the negotiations can create. The speakers were in agreement that any significant shocks to the financial architecture currently in place (e.g. access of UK-based firms to financial infrastructure in the EU) will not be of technical nature but the outcome of political decisions. As Gerry Cross put it, regulators’ objective is financial stability and that takes cooperation between the authorities of different jurisdictions, but in this negotiation that translates into hoping for the best and preparing for the worst.

The good scenario was also discussed. Simon Gleeson took the view that this would correspond to the broad continuation of the current situation. The rationale is that London is to remain Europe’s major financial center for the foreseeable future and EU27 will be interested in having a say about how it is regulated. In exchange, it makes sense to offer some equivalent form of market access.

Finally there was the related question of whether common interest among supervisory authorities can yield the much needed cooperation, even in the event of a hard Brexit. Nicholas Veron offered examples where regulators from different jurisdictions dealt with globally systemic threats during the financial crisis despite the absence of explicit, formal agreements. But Mr. Gleeson listed counterexamples, which he attributed to the specific, legislated and binding remit supervisors have to respect that is none other than to ensure financial stability in their own jurisdiction.

Event noted by Konstantinos Efstathiou , Research Assistant


Presentation by Simon Gleeson