The FCA and EU FX regulatory passporting: Theresa May signals her will to end it, saying it makes London a “rule taker”

There is no substitute for self-determination.

In the case of the City of London, the world’s absolute powerhouse for the electronic financial markets industry right from the domination of the Tier 1 interbank FX desks that adorn the docklands at Canary Wharf to the non-bank institutional prime of prime brokers and retail FX giants that nestle between Tower Bridge and St Pauls Cathedral along the northern shores of the River Thames, self-determination is an absolutely apt description.

Quite simply, London’s highly advanced commercial ecosystem from the banks to the technology and connectivity services power the world’s OTC derivatives industry to the point at which the Square Mile employs just 0.0009% of Europe’s workforce yet produces 16% of all tax receipts.

The mainland, by contrast, is a barren expanse of infrastructure-free socialist trade unionism, debt, corruption and central government dependency, backdropped by absolutely no modernity or electronic financial markets acumen.

Thus, the European Union-wide MiFID directive on market infrastructure’s regulatory ‘passporting’ facility in which Europe-based brokerages and non-bank financial services companies can ‘passport’ their regulation across borders and by default align themselves with an FCA regulated British firm is very much a one way street, that being the European firms wanting to gain credibility from the halo effect of being associated with British regulatory status, rather than the other way round.

Much discussion has taken place at national level, including in Cyprus, where over 15o CySec regulated FX brokerages exist, some of which are large and very much aligned with their British counterparts to the extent of having a London office with its own separate FCA license, and some of which are small companies whose main operations are outside the EU, and which disingenuously onboard clients offshore whilst promoting themselves as regulated in Europe.

Passporting, therefore, has become a uniquely British discussion point, however until now, very little actual action has taken place.

Skepticism runs as far as North American FX industry leader Glenn Stevens, CEO of GAIN Capital, who, shortly after his firm acquired City Index in London, famously ridiculed the passporting facility as non compliant.

Traders are “literally able to open an account as Kermit the Frog and Mickey Mouse” with some firms, Mr Stevens told the London Evening Standard newspaper in 2015.

According to the paper, Mr Stevens called on the FCA to “tighten” its stance on passported firms. He said, “On the one hand having competition is good. But having competition that plays by different rules isn’t good. Too many of these companies operate kind of dodgy.”

Since that time, the British electorate took to the polls in order to vote on Britain’s fate as a member state of the European Union, and quite rightly voted to go independent, raising a genuine cause for the removal of Passporting, however nothing of that nature has taken place yet.

This week, however, British Prime Minister Theresa May spoke publicly whilst on prime time television with renowned British historian and presenter Andrew Marr, saying that a new trade deal with the EU will go further than the bloc’s agreement with Canada, and that the UK must leave the Single Market.

Prime Minister May said there were several trade deals which included a commitment to financial services, citing the trade deal the US and the EU were previously trying to agree.

“Financial services are referenced in, for example, the deal with Canada,” she said. “Yes, we want to go further, yes, but that’s a recognition of the very important role that the City of London plays, not just for the UK, but actually for the rest of the European Union.

“If you look at the significant sums of money businesses in the EU27, in those other countries, actually raise through the City of London, it matters to them as well. But if we were to accept passporting, we’d just be a rule-taker, we’d just have to abide by the rules that were being set elsewhere, and given the importance of financial stability, of ensuring the City of London, we can’t just take the same rules without any say in them.”

Absolutely.

Indeed, the shackles of cost and bureaucracy as London’s Square Mile funds the vast majority of an entire continent’s flagging and lethargic economies, its ultra-modern, highly skilled and plate glass enterprises a bastion of business suit work ethic and leading edge technological prowess compared to mainland Europe’s corruption, siesta culture and absolute lack of modernity or industry leadership, has been shrugged off, however due to London’s absolute dominance over every other city in most areas, European investors and institutions rely on it for all manner of services, both retail and institutional.

This, therefore, is a double-edged sword when it comes to navigating a Britain-European Union relationship post Brexit, and as a result, the City is looking exercise its control via diplomatic engagement with EU Member states.

Britain’s post Brexit livelihood remains not only very bright, but due to the City of London being home to the entire global ecosystem, trade with other countries outside a Europe blighted by blazer-brigade bungling, derelict national economies, no infrastructure, and a reputation that is becoming a serious concern for playing host to firms that have token MiFID II regulation via a small office in Cyprus or Malta and operating their business in a non-compliant fashion from other regions of the world.

Prior to Mrs May’s speech on television and for quite some time ever since the Brexit poll was counted, FinanceFeeds has championed the cause of a free London, a London that can do business with its genuine aligned commercial partners.

London’s real partners are Hong Kong, Singapore, Australia, North America, the Middle East, South East Asia and mainland China. Modern, thriving and unencumbered regions with alignment with the electronic financial markets sector that London provides to the world.

The very Tier 1 banks that operate from London and form the largest FX market providers in the world, are multinational. Some are British, some North American, some French and some German, but they all operate from London as separate British companies.

Indeed, many banks have closed their operations in mainland Europe entirely, and sold off entire business units to concentrate on Tier 1 interbank dealing from London, which makes perfect economic and business sence.

Citigroup and HSBC, two of the largest interbank FX dealers in the world, are apparently ridding themselves of a sizable proportion of their retail customers and closing down high street branches, with Citigoup having intentionally waved goodbye to 69 million customers on its retail side since 2007.

Britain’s financial giant HSBC removed 1,600 U.S. locations, including its subprime-lending business, and closed more than 500 branches in the United Kingdom, and Citigroup has sold or shut more than 1,300 U.S. branches in the past decade, including its consumer-lending network, to concentrate on major cities.

What is difficult to comprehend here is not the actual figures involved or the corporate decision to reduce the number of retail outlets, downsize human resources, and move the focus away from resource and service-hungry retail banking but why this is being regarded as a negative matter.

Overall, sentiment in the City of London has been welcoming of Mrs May’s speech, saying that she was right to seek a bespoke deal with the European Union. Nicky Morgan, chair of the Treasury select committee, welcomed May’s “realism” and willingness to compromise.

Back in June 2016 ahead of the Brexit vote, FinanceFeeds predicted that unless Britain retained membership of the EEA (which we considered quite unlikely at the time), the UK in the event of an exit from the European Union would become a “third party” for the purposes of much EU legislation.

FinanceFeeds opinion at that time was that in order to continue to do business with EU entities, the UK would need to maintain a regulatory environment at least “equivalent” to that of the EU despite not benefitting from the advantages of being a member. Obtaining an equivalence decision could be time-consuming and may become political.

In certain cases (e.g. UCITS), there is no equivalence regime and in others (e.g. MiFID II) the regime is uncertain, or has never been used.

Companies that currently rely on on the EU “passporting” regime will probably need to set up a separately authorised subsidiary in Europe, and transfer some staff there, in order to continue to do business with EU customers.

Bearing in mind that the FX industry in Cyprus is so well developed, and a vast amount of skilled employees based there are either originally from the UK, or are native-level English language speakers, it could become an even more attractive region for FX firms, albeit this time secondary (or tertiary) branches of large British electronic trading firms wishing to maintain the ability to passport their licenses, hence firms of any decent size or standing could do well to have both FCA and CySec licenses, and those with any intention of going offshore, should abandon such intention for the sake of the sustainability of their business.