EU-US extraterritoriality plans threaten London
Legal experts are concerned Europe will become less hospitable to global market participants under a European Commission scheme to streamline regulation of foreign financial institutions, while the UK government has joined calls to halt the US prop trading ban’s application beyond American shores. In particular, there are fears that international finance hubs such as London could suffer as regulators attempt to extend their reach into other jurisdictions.
Brussels policymakers are poised to recommend an omnibus of financial regulation that would sit above all present legislative proposals, controlling criteria for third-country firms operating in the European Union (EU).
Disparity in how third-country firms are treated in the single market presently exists in a number of regulations, including MiFID II, the European market infrastructure regulation and the Alternative Investment Fund Managers’ Directive.
Peter Snowdon, a partner in the financial services group at London-based law firm Norton Rose, said third-country rules and, to a lesser extent, issues of extraterritoriality were previously determined by member states.
Third-country rules attempting to regulate foreign firms by domestic standards are often criticised for their ability to stretch outside of the jurisdiction they govern. For instance, under MiFID II, third-country firms will be required to show their home regulation is “equivalent” to EU rules before they can request to provide financial services. The rule effectively means firms must abide by European rules even when operating outside the EU.
“The commission has generally been moving towards capturing third-country firms in European regulation and it looks as if they are considering drawing all these initiatives together in one overarching piece of legislation,” said Snowdon. “It is attempting greater harmonisation of the markets, and there is not much doubt in my mind that they have the legal ability to do this if they want.”
Snowdon said US firms operating abroad have always been very careful to accept the imposition of extraterritoriality by US regulators.
“It is probably inevitable that the European authorities would sooner or later seek to develop their own extraterritorial powers,” said Snowdon. “However, the interesting question is what happens when such obligations come up against requirements in other jurisdictions such as the US?”
Philip Morgan, a partner in law firm K&L Gates’ investment management practice group in London, said it always used to be the case that the US was the jurisdiction most renowned for enacting regulation having extra-territorial effect but now it looked like Europe was becoming worse.
“The Commission is proposing for the extension of EU financial services regulations in a number of areas to overseas persons through requiring that their home jurisdiction has in place regulations equivalent to EU regulation, the authority for this ‘global’ approach being the high level direction of regulation agreed by the G20,” he said.
Snowdon warned the rule could hit London harder than other European markets.
“This would be quite significant for the UK, which has so much cross-border business,” he said. “But while there may be a sense in Europe that this is a London problem, some other EU countries may not realise just how significant third-country rules would be for their own markets. Many European markets do business with third-country firms which operate through London.”
In December, UK prime minister David Cameron vetoed plans for a new EU treaty after he failed to secure concessions that would protect London's financial markets from legislation that might damage its competitive position.
UK voices Volcker fears through back channels
Extraterritoriality concerns over new US regulations have also caught the attention of governments globally.
The so-called Volcker rule banning prop trading by deposit-taking institutions has recently come under fire from the international community as instruments and firms outside the US may also come under its jurisdiction if they had US connections. So far, these connections have only been loosely defined by US lawmakers.
Last week US regulators received a letter from the Canadian government, which was concerned the Volcker rule’s specific mention of Canadian bonds could lead to a squeeze in liquidity in its markets. Japanese watchdog the Financial Services Agency has sent a similar letter to US regulators.
A source in the UK Treasury department confirmed to theTRADEnews.com today that the UK government had been in touch with US counterparts through the UK embassy in Washington to voice its concerns over Volcker. However, the source said there had not yet been any ministerial complaints.
“The Treasury has been sympathetic to some of the concerns of [UK] banks and it wants to do more to work out a solution,” he said.
UK banks are concerned that US firms could be prevented from holding foreign government bonds in their own accounts and that this would substantially reduce liquidity.
US derivatives regulator the Commodity Futures Trading Commission handed down its version of the Volcker rule last Wednesday, mirroring a joint rule proposed in October by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the Securities and Exchange Commission.
The period for public consultation over the jointly-proposed rule was last month extended from 13 January to 13 February.