EU Commission and HM Treasury sign memo of understanding​

By Jake Rickman​

What do you need to know this week?

The EU Commission and UK government via HM Treasury yesterday signed a memorandum of understanding, which signifies in overview the commitment of both the UK and EU to work together to preserve financial stability.

The memorandum of understanding, while not legally binding, sets out certain broad mechanisms the parties will use in pursuit of the objective of preserving financial stability:
  1. A twice-yearly meeting where representatives of both the UK and EU will exchange views on important regulatory developments and market activity.
  2. Transparent communication on matters related to the divergence and equivalence of each party’s regulatory regimes.
  3. A commitment to enhanced cooperation and coordination on international matters.
As a BBC article summarising the development notes, the memorandum of understanding does not mean that the UK will guarantee that future regulation will conform with the EU’s, in a process known as equivalence.

Equivalence is a principle of EU financial regulation where the EU treats the regulatory regime of a non-EU country as equivalent to its own. Practically, it allows foreign financial services firms to operate in the EU market as if they were regulated by the EU. The UK lost its equivalence status following its final withdrawal agreement from the EU in 2020.

Why is this important for your interviews?

Financial market regulation is a dynamic and complex area of the commercial world. If you are interested in advisory work, keeping abreast of the ever-shifting relationship between the EU and the UK will improve how interviewers assess your commercial awareness.

The memorandum of understanding suggests that the UK, under the leadership of Prime Minister Rishi Sunak, is taking a more pragmatic approach to its relationship with the EU. On balance, financial services clients operating in the UK and EU will welcome this shift because it suggests a commitment to prioritising market stability rather than political manoeuvring, as was the ostensible case under the premierships of Boris Johnson and Liz Truss.

If trends continue, the UK and EU may implement more concrete alignment measures, which will be welcomed by many City clients. That said, some other City voices may disparage any recommitment to aligning the regulatory regimes of the EU and UK because of the perception that the EU imposes too onerous obligations on firms servicing financial markets.

To give a concrete example of how regulatory equivalence and divergence operate, take the Basel III and Solvency II regulatory accords. Both Basel III and Solvency II are international frameworks designed to enhance the safety of financial markets following the aftermath of the Global Financial Crisis. Basel III regulates banks, whereas Solvency II regulates insurance firms.

Commentators have observed that the EU and UK are currently implementing the objectives contained in both Basel III and Solvency II in different ways. For instance, the UK government has maintained that it intends to reform Solvency II implementation so that insurance firms can invest their massive capital resources into growth equity. The EU has not embraced this approach. This could lead to divergence and create barriers to future cooperation, but which the new memorandum of understanding may help avert.

How is this topic relevant to law firms?

Advisory practice groups in firms like Clifford Chance and Linklaters are instrumental in advising the government and its ministers on their pursuit of regulatory reform. They likewise advise the firms themselves on their effects.