LONDON — Brexit? What Brexit?
In a reversal of the roles they've been used to playing, Britain is demanding the EU toughen up rules, worried about the threat of another financial crisis.
It's the ultimate irony. Britain's departure from the bloc was supposed to mean breaking loose from Europe's shackles and ushering in an era of light-touch regulation for the City of London.
But three years on, it’s British authorities who are lobbying the EU to impose stronger safeguards on a wobbly part of financial markets — whereas Brussels technocrats aren’t so sure.
Top U.K. officials from the Treasury, Bank of England and Financial Conduct Authority will raise concerns about the EU’s lax approach during a charm offensive this week in Belgium.
“There are different feelings on how fast things can move,” said one U.K. official, granted anonymity to speak freely because discussions between the two sides are confidential. “There is more impetus on the British side to move and move quickly lest something go wrong.”
It's a problem for British watchdogs, including the Bank of England, because they're powerless to address a vulnerability in the U.K.’s financial system without EU action, since the risks are stashed in Dublin and Luxembourg.
Now’s the chance to ram the message home. U.K. authorities will host a reception in Brussels and send senior staff to a twice-yearly schmoozing event with the financial industry — known as Eurofi — in Ghent this week, as they try to win over their EU counterparts.
A specific type of investment fund is the cause of the tension. Money market funds provide quick access to cash for companies and investors, helping oil daily business life.
But in times of crisis they have struggled to keep up with intense spikes in demand. This was seen at the start of the pandemic, when companies wanted their money back in the “dash for cash” — ultimately forcing central banks to pump money into the financial system.
The BoE is particularly exercised because sterling funds came under stress both in the pandemic and during the bond-market turmoil following former U.K. Prime Minister Liz Truss’ government’s disastrous mini-budget in 2022 — and it really doesn't want a repeat.
Money market funds are an “important vulnerability” for the U.K.’s sprawling financial system, the BoE said in a December report. Britain's financial watchdog set out plans that month to require the funds to hold more easy-to-sell assets to be able to withstand more pressure.
Yet the U.K. can't go it alone because 90 percent of sterling money market funds are based in the EU — meaning they fall under the bloc's regulations. And the EU just doesn’t see the urgency.
The EU’s rules for money market funds have “overall successfully passed the test” and don’t require any legislative fixes, the European Commission said in a report in July last year.
The EU framework "comprises robust fund and liquidity rules, ongoing disclosures, regular stress testing and reporting for a close monitoring by competent authorities," a Commission spokesperson said.
"It also identifies certain vulnerabilities in the market for MMFs and areas which would merit further assessment."
EU officials relayed that laid-back stance after their U.K. counterparts raised the issue at an October forum — the first since Brexit — to discuss financial regulatory issues. With the European election looming in June, Brussels won’t even consider legislation until at least the end of this year.
Britain has been trying to apply pressure. As well as raising the issue via Brussels, U.K. authorities like the BoE are talking directly to the Irish and Luxembourg watchdogs, although they may have limited scope to act alone. And the U.K. is pushing for wider international reforms through global regulators like the Financial Stability Board.
“There will be pressure directly or indirectly,” said the U.K. official.
Still, the U.K. can’t force the EU to do anything. And there's some irony for Brussels in the British predicament.
Until now, it's been London's dominance in the clearing of euro derivatives that has been the major Brexit flashpoint between the two sides when it comes to financial services.
Brussels wants to shift euro clearing out of London as it fears it wouldn’t be in control in a crisis. The U.K. doesn't think it should budge as the EU benefits too from the scale of the business available in the City.
Now, the U.K. faces the opposite dilemma. British regulators may not want money market funds to move over the English Channel, but they're facing a lack of control over a part of financial markets that gives them cause for concern.
“This is clearing, the other way round,” said a fund lobbyist. “How do you satisfy yourself that all possible risk is covered, when you're not in the driving seat?”
The U.K government could start demanding EU funds meet a higher bar to be sold in the U.K. in a few years’ time. But in the meantime, the risks lurk outside their immediate reach.
Kathryn Carlson contributed from Brussels.