The Windsor Framework: delivering an EU-UK Financial Services Dialogue

Following the Windsor Framework agreement, the EU and UK can now press ahead and sign the planned Memorandum of Understanding (MOU) on financial services and hopefully set up an ambitious bilateral financial regulatory dialogue.

This dialogue should build on existing supervisory cooperation and become a forward-looking mechanism to share best regulatory practices, work together on challenges to financial stability, minimise cross-border regulatory barriers and align both sides' regulatory frameworks on global standards. I discussed these issues recently in an interview with Karel Lannoo, CEO of the Centre for European Policy Studies in Brussels. He shared my sense of optimism.

Short-term issues for the EU and UK

Both sides face similar short-term issues, for example in the banking sector, and huge, identical challenges in the medium and longer-term in dealing with all aspects of digitisation, such as digital assets and the development of Central Bank Digital Currencies (CBDCs), and in financing the green transition. The financial sector should and will support such regulatory cooperation.

The Windsor Agreement can unlock the Memorandum of Understanding

The recent Windsor Framework agreement has rightly led to the expectation that some of the elements of the EU-UK Trade and Cooperation Agreement (TCA) will now be unblocked. Key for those of us in the financial services sector is the establishment of a financial regulatory dialogue. This dialogue is to be set up under the MOU and to be signed by the two sides. It was therefore good news to see that the bilateral TCA Partnership Council, which met on Friday, 24 March, specifically referred to moving forward with the MOU.

The MOU is important because the TCA contains almost nothing on financial services apart from this commitment to set up a financial regulatory dialogue. Such a dialogue is not a new idea - the EU and UK both have formal dialogues with Japan following their respective trade deals and the EU and UK both have informal dialogues with the US. But it will be the first time for a dialogue between two partners with such similar industries, financial services rules, and with officials and regulators who know each other so well.

The need to manage expectations 

But first, a moment of realism. Both sides need to rebuild mutual trust after the Brexit divorce. There is still a lack of trust at a political level, despite the recent rapprochement and agreement at Windsor having significantly improved matters. The European Commission and some member states dislike some of the political rhetoric in the UK about diverging and deregulation and talk of a post-Brexit dividend in financial services. The Edinburgh reforms to financial services are understandably under close EU scrutiny. The UK Government, and UK regulators, for their part, dislike EU attempts to apply strategic autonomy arguments to financial services, particularly in wholesale capital markets where the UK has traditionally been so dominant.

It is welcome that UK ministers have been at pains to explain that the Edinburgh reforms are not about deregulation and that the UK will stay broadly aligned with the EU. It is also clear that ongoing supervisory cooperation continues to work well. The EU agencies evidently still have warm relations with their UK counterparts and still seem open to their advice (and vice versa). But we should be realistic that trust will take time to embed in the new, post-divorce relationship.

There is an unrealistic expectation I hear sometimes in the financial sector that the dialogue will automatically lead to improved market access and in particular to each side granting each other equivalence in specific areas. This is not the case. Both sides will treat each other as foreign jurisdictions, and in those rare cases where cross-border access is permitted in legislation, both sides will want to follow the due process set out in that legislation. This is particularly important in clearing where the UK has only been granted temporary equivalence to June 2025.

An ambitious and forward-looking dialogue

The two sides should nonetheless now seize the initiative and use the positive momentum of the last couple of weeks to finalise the MOU and launch the dialogue. A good first step would be a bilateral meeting between the EU Commissioner for financial services and the UK Chancellor. A working-level dialogue could then begin work almost immediately. The two sides have much to talk about.

The EU has an ongoing ambitious plan for a deeper, more integrated single market, with sustainability and innovation at its heart. The UK, for its part, just issued a joint regulatory action plan with over 140 elements, and it too is prioritising sustainability and innovation. And both sides are thinking hard about financial stability, given recent developments in the banking sector.

I would suggest the following elements be considered for inclusion:

1. A joint financial stability council 

   Just as the US set up their Financial Stability Oversight Council (FSOC), and the EU set up the European Systemic Risk Board after the last global financial crisis, the two sides could bring together prudential and market regulators under political leadership to identify sources of financial stability risk and recommend policy responses. The UK Financial Policy Committee in the Bank of England currently has a similar role in the UK and issues a regular Financial Stability Report.

   Both sides could share their analysis of forthcoming stability threats and aim to come up with aligned policy actions. They could also have a mandate to cooperate globally in the G20 Financial Stability Board in Basel. The stability council could also have a mandate to address issues such as the stability risk arising from cross-border activity such as derivatives clearing houses, where they could for example recommend closer shared supervision.

2. Cooperation in financing the green transition 

   The dialogue could establish a joint working group on how best to formulate regulatory policy on fighting climate change and managing ESG risks. I am worried that both sides are hard at work on this but risk coming up with slightly different regulatory solutions on important issues such as taxonomy definitions, ESG ratings, product labelling and other measures to tackle greenwashing. in this space, as shown by the Glasgow Financial Alliance for Net Zero (GFANZ), particularly on how to finance the green transition.

3. Cooperation on digital financial services

   The financial services sector is undergoing a radical digital transformation. Regulators on both sides are wrestling with how to deal with innovations such as cryptocurrencies and stablecoins, tokenisation and distributed ledger technology (DLT). Both are also working on setting up Central Bank Digital Currencies. A joint finance ministry and central bank group to share best practice on CBDCs and on digital innovation in financial services would make a lot of sense.

4. Strengthening co-supervision

   Supervisory colleges work well, and many firms have an extensive cross-border presence either in subsidiaries or branches. Supervisory cooperation could perhaps be reinforced with improved data sharing, and this group could make recommendations to both sides on how to make supervision more efficient. Topics like improved electronic reporting could be discussed. Secondments of supervisory staff might be helpful too.

5. Joint action on financial and economic crime

   One of the striking areas of recent bilateral cooperation is sanctions against Russia. It seems to me that the two sides could build on this experience in developing a deeper relationship in the fight against financial crime and terrorist financing and on a joint approach to sanctions. This would cover important and difficult areas such as data sharing and working to increase the efficiency of the current regulation.

6. Improving mutual access and reviewing the TCA

   The TCA is due to be reviewed by the next Commission and the next UK Government. We hope that those discussions include improved mutual access for services and of course financial services. The dialogue could usefully advise on how mutual access could be applied in certain areas of financial services and explore how each side could build on trust in each other’s supervisory processes to offer end users greater choice and access to foreign markets.

A voice for the industry

The format of dialogue is for the Commission and HM Treasury to decide. My advice would be that this dialogue should meet formally twice a year, with regulatory authorities attending as well, and should have the mandate to report annually to EU Finance Ministers, with the UK Chancellor attending that meeting. It might also be useful for supervisory agencies to meet bilaterally. We would also welcome a role for parliaments in supporting such a bilateral dialogue. The EP ECON Committee might for example invite the UK Chancellor to report on cooperation once a year. The Eurozone President and ECOFIN Presidents could similarly be invited to the UK Treasury select committee. The dialogue could in any event be supported by an annual bilateral meeting of the EP economic committee and the Treasury Select Committee. Both having strikingly similar agendas.

The dialogue could also be supported by a UK-EU industry Financial Services Council. There is already a UK-US industry body comprised of trade associations on each side which could be a model. The existing European Financial Services Round Table could play a role perhaps since it already includes major UK and EU firms (but not US firms). But I think a wider industry grouping with some consumer and end-user input would make sense. Perhaps such a pan-European industry body could be asked to report annually to the two sides on how it sees regulatory cooperation working in practice.

Concluding thoughts: An opportunity to seize

The Windsor Framework is a breakthrough moment. Both sides should take the opportunity to activate the MOU and launch the EU-UK Financial Services Dialogue as soon as possible.

About the author

Nick Collier joined the City of London Corporation as Managing Director of the Brussels office in March 2019. He was previously Global Head of Government Relations at Refinitiv (Thomson Reuters). Before that he worked at a range of organisations in the financial services sector, including Morgan Stanley and the Bank of England and, until recently, served as Chair of TheCityUK’s Public Affairs Group as well as Deputy Chair of the International Regulatory Strategy Group. Nick is chair of diplomatic engagement at the International Business and Diplomatic Exchange. He holds a MSC in Economics and Finance from the London School of Economics and a BA from Oxford.