EU cannot be ‘captured’ by City of London, warns financial services chief

The EU cannot permit itself to be “captured” by the City of London given the UK’s plans for regulatory divergence, a top European official has warned, as she urged the financial services sector to prepare for change after Brexit.

Mairead McGuinness, the EU’s financial services commissioner, said that the bloc’s goal was to ensure in the medium and longer term that it is not overly reliant on third countries in strategically important areas, be they pharmaceuticals or financial services. 

She said this was critical in the case of financial stability, where the EU needed to respond to the “logic of Brexit” — namely Britain’s desire to deviate from the EU in the realm of financial regulation. 

“Our interest is making sure that we are not captured by a system that we don’t regulate, or controlled by it,” Ms McGuinness told the Financial Times in an interview.

“I think some of the stakeholders or market participants believe that nothing will change. And we have been at pains to say, in every sector including the financial sector, that nothing will stay the same as it is now, and [to] prepare for change.”

The EU has been considering whether to extend access rights — known as “equivalence” decisions — to parts of the UK financial services sector as the two economies prepare for Britain’s exit from the single market in just over two weeks. In doing so, the bloc is balancing competing priorities, as it seeks to ensure European companies have ready access to finance even as it pursues a strategic autonomy agenda — allowing Europe to stand on its own two feet without relying too heavily on countries outside the bloc. 

The position of the City is particularly complicated, given it has been the EU’s dominant financial capital, but will soon no longer be part of the single market or subject to regulation or oversight from the bloc’s institutions. 

Ms McGuinness, a former MEP who took over as Ireland’s member of the European Commission two months ago, said that in time a system of “regulatory co-operation” with London could evolve, similar to the one that the EU has with the US.

But she said that the EU also had to ensure it was in a position to offer crucial financial services without relying on others — a stance already put into practice by the EU’s decision to grant only temporary equivalence to London in the systemically important realm of clearing and settlement.

“I know all the arguments that London is big, and we acknowledge that, and it has built up because it’s been part of the European Union,” she said. Highlighting the EU’s projects to build a “banking union” and “capital markets union”, she said: “We are trying to take control of our system in a way that services our needs as Europeans, and also [ensures] that we’re not vulnerable. So I think we need to look at that and be quite frank about it.”

Ms McGuinness was speaking ahead of the launch today of a plan aimed at bolstering the strength of the union’s banking sector and ensuring it can carry the weight of financing Europe’s recovery from Covid-19. 

The strategy prioritises the development of secondary markets to help banks offload non-performing loans and offers Brussels’ support in helping member states put in place national asset management companies to take on the bad debts. 

Ms McGuinness told the FT that it was crucial that struggling businesses and other borrowers contacted their banks early to arrange a repayment plan, adding that Brussels was determined to prevent any repeat of the harsh treatment meted out to some borrowers in the last crisis — a crisis in which her home country of Ireland was one of the hardest hit. 

“I still think there’s a legacy there of economic implications, but also personal stories and tragedies that unfolded,” she said. “Sometimes when people or businesses have a financial difficulty, they probably don’t realise that they have rights. So we will be at pains to say, you do have rights.”

Two of her broader priorities, which were also underlined by EU leaders at a summit last week, are the capital markets union, which aims to enhance cross-border investment, and completing the eurozone’s banking union arrangements for protecting financial stability. 

On the banking union, Ms McGuinness said that the EU needed to review its system for handling stricken banks, saying that arrangements put in place after the last financial crisis were showing their limitations. 

She noted that so far only one bank, Spain’s Banco Popular, had been put through the eurozone’s centralised resolution system for dealing with failed lenders, while other cases had been handled under different rules through national insolvency proceedings. 

“I think the structure is in place but we know that it is not being fully utilised in the way we’d like it to be,” Ms McGuinness said. “We do want a system where there is an organised, if you like, reconciliation or solution [for] banks that are under pressure, which doesn’t see the taxpayer picking up the tab.”

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