As was highlighted by European Commission Vice President, Valdis Dombrovskis, last week, the future of Europe’s flagship project to boost intra-EU capital flows is in need of focus, energy and political support. Despite the progress that has been made to date, Europe's capital markets remain fragmented along national lines and continue to lag behind the US, where highly developed capital markets allow businesses to easily access the capital they need to develop and grow. The Capital Markets Union’s (CMU) overarching objective of creating a financial ecosystem which supports Europe’s businesses to flourish has been a long-standing priority for the EU. Some early successes such as the introduction of a new framework to reinvigorate securitisation markets and reforms of prospectus regulation, which made it easier for SMEs to list shares on stock exchanges, were a promising start. But to achieve the real step-change that is needed ambitious reform in areas such as creating a vehicle for pan-European pension savings and significant streamlining of insolvency regulation are also needed. But with significant hurdles such as Brexit and European Parliament elections on the horizon, for major advances to be made there must be renewed political momentum to ensure CMU remains a priority. There is no doubt the departure of the UK from the EU poses the possibility of substantial disruption for Europe’s capital markets. But CMU will arguably become even more important after the UK, one of the EU’s largest economies, departs from the bloc. Sustaining momentum on such a large-scale project is a challenge, so in order to keep focus AFME is proposing a set of measurable Key Performance Indicators (KPIs) for CMU are introduced, to track progress in key policy areas. Such indicators would aid politicians to prioritise what action and initiatives need to be pursued with the most urgency. It is also important to understand the differences between member states in terms of how well developed their capital markets are. Such KPIs could also help to identify the countries which have the furthest to go versus those where their markets are more well-developed, and where lessons can be learned. As the end of the current Commission approaches in October 2019, so too does its self-imposed deadline for having delivered the first stage of the CMU action plan. This is a tight and demanding timescale. But the scale of CMU’s ambition has always meant it would need to be a long-term project and 2019 should not be viewed as the end of the story. The next Commission must continue the good work done to date. Launching new initiatives is just the start of the process. The project will continue to need political ambition and commitment to address the long-term strategic issues and barriers that restrict the flow of capital both from within and outside Europe. As the EU gears up for a new Commission from 2019, now is the time to push CMU to the top of the agenda, and steer it with renewed purpose and vigour. The need to do so has never been more important. This opinion was first published in EurActiv on 23 August 2018

Throughout July 2018, I spent a month working at AFME as part of the Career Ready programme. Career Ready is a scheme that provides young people with the chance to get an insight into the business world. At the moment I am not planning to attend University, so I applied to the programme as I thought it would help me to explore my options, gain valuable work experience and build up my confidence. A career in finance interests me as the industry continues to adapt and change following the financial crisis, and Women in Finance is becoming an ever more prominent movement. I also think the sector will suit me well as I have a passion for working hard and facing new challenges! I was excited to start my AFME internship as I was given the opportunity to spend time in four different departments – allowing me to benefit from a wide range of experiences. I spent time with Operations, IT, Capital Markets and finally External Relations (which includes events and communications). I have learnt many new things during my time at AFME and have been given the opportunity to work on a range of different projects. In my week with the Capital Markets team, for instance, I assisted the team to produce research in areas such as government bonds and equities, areas already of interest to me due to my A Level studies in finance. Another area I found particularly interesting is how ‘Green Finance’ is growing and becoming more important in the financial industry. There is much more that the green finance sector can do to raise awareness and understanding of the work it is doing. I think I would like to further my research on this topic as it is definitely something I am considering getting involved in when I leave sixth-form and enter the world of work. People skills are important in any role and I was lucky to spend some time with the HR team, participating in the recruitment process and helping to ensure the right candidates made it to the final interview stage. I was able to be a part of over-the-phone first stage interviews where I experienced how interviewers handle difficult situations with unsuitable applicants, as well as congratulating certain candidates who made it through to the next stage of the process. My time with IT was also very instructive, including a visit to the ‘Comms Room’ where I learned how important the equipment is to ensure everything runs smoothly. A task of mine that week was to create a short guide on using ‘Secure Print’, I managed to complete this quickly and efficiently which is something I am proud of. But a real highlight for me was being able to research and then present three exciting initiatives related to wellbeing that AFME could potentially invest in. I chose how mindfulness can increase employee morale, the benefits of flexible working hours for a business in the financial industry, and how diversity impacts an organisation. I was able to get in touch with external companies to arrange times and dates for them to hold a mindfulness course at AFME, as well as diversity training. My final week at AFME was spent with the external relations team where I had the opportunity to attend the Summer Charity Event at Mudchute Farm where I helped make a short film throughout the day to post on the AFME website. Overall, my experience at AFME has been wonderful thanks to everyone I had the opportunity to work alongside and all the employees who made my time here interesting and beneficial. I have learned a lot during my time and broadened my skills, especially my confidence and knowledge of how a financial organisation is run and who is involved.

We are now just past the one-year anniversary of the launch of the FX Global Code of Conduct, a voluntary set of principles introduced to promote integrity, restore trust and ensure effective functioning of the wholesale FX market . This has been a unique undertaking – a public-private effort on a global scale, involving a diverse set of market participants. Given that it is voluntary, unsurprisingly, there was some initial scepticism around how the Code would work in practice. However, the fact that it has been developed by the participants in the market – including the Central Banks - means that as an industry , for the first time, we now have a globally-accepted and agreed set of principles under which the industry should operate. This common set of standards and behaviours is expected from all wholesale FX market participants, be they dealers, brokers, liquidity providers, buy-side, corporates, hedge funds or venues. Certainly, we’ve seen the Code becoming increasingly embedded within the industry over the last year and are encouraged that the 25 global FX dealer members of the GFMA’s Global FX Division have all committed to the Code. This group – headquartered in a diverse range of jurisdictions - collectively represent close to 80% of the FX dealer market. As the code has developed, all have made significant enhancements to their conduct and control standards, processes and business models. The seriousness with which the Code is treated has meant that significant resources have been spent over the past year carrying out audits and checking that banks’ processes and policies meet the code’s expectations. Additionally, over the last year, the understanding of the Code amongst counterparties has increased. Central Banks have been clear that they expect their counterparts to be signed up to the Code and that it is also a prerequisite of Central Bank FX Committee membership. Additionally, there is also a growing expectation from underlying asset owners that asset managers involved in wholesale FX market should both commit to the Code and in turn, look to engage with those dealers who sign up to the Code. This is a key point as for the code to be maintain its momentum and be successful, all market participants need to commit to it. It is in no-one’s interest to have a two tier market evolving of those who have signed and those who have not. The Code’s introduction means that the industry is now in a much more robust position and clear progress is being made - as can be seen from the various registers – as market participants sign up and are now ‘living’ with the Code. We know that there is already greater dialogue between counterparties clarifying the nature of the relationship in deal scenarios, expectations of how orders will be handled and executed and how information is shared. The Code – with cross industry participation - has tackled a number of the tough “grey areas”, clarifying the acceptability of pre-hedging practices where these are to benefit the client and establishing the transparency requirements and position around “Last Look”. However, there is still work to do. For example, the effectiveness of the Code and enhancements to participants’ processes and controls will need to be continually assessed. This assessment will no doubt involve testing programmes and audits to assess any breaches, as well as an expectation that remuneration will take into account the high standards of conduct, ethics and adherence to procedures expected of all. Furthermore, with a market as global and diverse as FX, which continually develops, and which has embraced technology with increasing levels of automated trading, the Code will need to evolve with it. One year on, the FX industry is very clear about the path forward. It is now up to market participants to demonstrate that this private-public partnership creates a new way of working to deliver the robust, effective and well-functioning global FX market required to underpin global trade and investing

While there has been a reduction in the size of the European NPL stock since its peak in 2013, NPL volumes have remained higher than pre-crisis levels. At the end of 2016, NPL volumes were still estimated at around EUR1 trillion. The EU’s NPL ratio has also remained higher than those of other jurisdictions such as the US and Japan. In order to help tackle this problem, in 2017, the European Council introduced an Action Plan to speed up the reduction in NPL stock and prevent new build ups of NPLs in future. Today, the work of the banking industry, together with the investor community and EU institutions, is starting to bear fruit. Encouragingly, NPLs have fallen by a third over the last 3 years – reaching EUR813 billion at the end of 2017. But the number remains onerous and if we look at EU as a whole – 11 Member States have NPLs at a level of 5% of loans (according to the EBA threshold for high NPL countries). So what are the European institutions doing to help tackle this problem? At AFME’s NPLs conference in Brussels this week, panellists discussed how the main authorities are prioritising action. Among the solutions, the Council’s NPL Action Plan includes various complementary policy actions. It not only focuses on dealing with the current problem of NPL stock, but also aims at preventing the problem from happening in future. However, the Action Plan cannot be considered as a one-size-fits-all solution since problems vary across jurisdictions. While insolvency regimes in some countries are problematic, the functioning of secondary markets are at the root of the problem in other countries. Therefore, it is not so much one key action the authorities need to take, but the overall set of measures they all need to work together on to implement. If the NPL Action Plan works, we should start seeing the transparency and quality of balance sheets improve, which could encourage banks to consider merging. At the same time, it could also reveal the need for some banks to raise more capital. Therefore, the question was also raised by panellists about whether the Action Plan could be a catalyst for bank consolidation. According to speakers, there are parts of the European banking sector where restructuring and consolidation could still go further. And with structural changes related to regulation looming, such restructuring may be needed. Banks may also be driven to further adjust and raise capital as certain business models based on substandard loan underwriting and excessive forbearance become less tolerated by markets and supervisors than in the past. If they are unable to adjust, then they may be driven to leave the market. Panellists at AFME’s conference concluded that we now know the size of the problem in the EU and clearly, there is a greater handle on the NPL-carrying ability of banks. However, the test will be when we see more market sales of NPLs. Market value is a true value and there will still be instances in some cases of banks having to take a further capital hit while they sell NPLs.

Achieving high levels of harmonisation and efficiency in post trade has long been aspired to by industry and regulators alike, and much good work has been done on furthering that agenda. But with significant market changes, technological advances and the important objective of achieving Capital Markets Union (CMU) there is now a clear imperative to push forward with renewed vigour. The Giovannini group first identified the key barriers to efficient and resilient post trade in Europe back in 2001. There have been many notable initiatives and regulatory changes since then, such as European market infrastructure regulation (EMIR), Central Securities Depositories Regulation (CSDR) and the introduction of the TARGET2-Securities T2S settlement platform. While each has brought improvements, the reality is that post trade remains segmented and processes continue to be delivered at a national, rather than pan-European level. More recently, the European Post Trade Forum (EPTF) published its report last year assessing the state of post trade in Europe. While much in the industry has moved on since 2001, including the size and complexity of markets and the growing role of central counterparties (CCPs), (i.e. some of the original barriers have been dismantled), it concluded that many of the same issues remain, and indeed some new ones have developed. It also published its own list of barriers to integrated post trade across Europe, thus giving the industry a clear and up-to-date mandate to work from. The report also acknowledged the crucial role of post trade reform in achieving CMU. A project which the Commission clearly remains committed to, having published its latest action plans on Fintech and Sustainable Finance in March this year. And, more widely, there continues to be strong support for CMU, including from AFME. Integrated post trade is an essential requirement in order for Europe’s capital markets to deepen, diversify and support economic growth. Many of the barriers to more efficient post trade relate to older processes and technology. With the advent of new technology, such as artificial Intelligence, cloud-based applications and distributed ledger technologies there is also the potential to revolutionise how post trade services are delivered. Regulators are rightly monitoring these developments. Creating standardised processes that can be managed and delivered at a truly pan-European level, without national barriers is a necessity if these technologies are to be fully utilised. The consequence for industry of not decisively gripping new technology, developing common standards and collectively maximising its benefits could be further fragmentation. Therefore, industry must work collaboratively on this. AFME has explored these issues and outlined some key objectives for public authorities and industry to achieve in order to resolve them in our latest 2018 White Paper ‘A Roadmap for Integrated, Safe and Efficient Post Trade Services in Europe’ due to be published towards the end of May. Areas of focus include a sound legal basis for cross border settlement, an efficient method of reclaiming withholding taxes, ensuring open access and interoperability for European CCPs, ensuring collateral management is harmonised and unencumbered by unnecessary restrictions and continuing the process of fully embedding T2S as a low cost, pan-European settlement platform. To make progress towards the robust but integrated, low-risk and low-cost post-trade eco-system needed in Europe, European and national authorities should prioritise reform, particularly ensuring that national laws and regulations are appropriately calibrated. Public and private sectors also have a key role to play, and there should be close and institutionalised cooperation between them. The overarching goals of post trade reform are well-established, the mandate and the foundations have been clearly set, now it’s time for action. On 23 May 2018, AFME will be hosting its eleventh annual European Post Trade Conference in London. To find out more:https://www.afme.eu/en/events/events-calendar/post-trade2018/ This opinion was first published in Global Investor on 10 May 2018

As the 25th May implementation date for General Data Protection Regulation (GDPR) fast-approaches, businesses across Europe will be turning their thoughts to the practicalities of operating under the new regime. For banks, effective data management is essential for providing an efficient and secure service to corporate and institutional clients. Therefore, being well prepared for its implementation is a crucial consideration. Especially given that banks are already subject to many different pieces of financial regulation and guidance, and not only is GDPR an additional and sizable regulation to consider in its own right, it also has the potential to clash with existing rules. Banks regularly need to respond to requests from financial regulators and law enforcement - often requiring them to obtain, analyse, and retain large amounts of personal data. The need to respond to such regulatory requests creates an obvious potential for conflict with the GDPR, which seeks to ensure data processing is kept to a minimum. While GDPR has taken this conflict into account, and does establish several bases for lawful data processing, it may not always be a clear-cut issue. “Legal obligation” to process data A key requirement under the GDPR is to establish a lawful basis for any processing of data. One of the lawful bases (the “Legal Obligation Basis”) will apply if the processing is “necessary for compliance with a legal obligation to which the controller is subject”. This will allow firms to continue processing personal data where necessary for compliance with EU regulations such as the 4th Anti Money Laundering Directive, the Market Abuse Regulation, theMarkets in Financial Instruments Directive, and the Second Payment Services Directive. Banks will need to be satisfied that the processing is necessary and they are able to demonstrate they have made an assessment prior to doing it. But generally, where complying with EU regulation is concerned, the situation is relatively straightforward. Data processing without a “legal obligation” But, while the Legal Obligation Basis solves the problem in many cases, it doesn’t address every possible situation because of the difficulty of establishing that processing is necessary for compliance with a regulation, as opposed to being, for example, good practice. In particular, it doesn’t address situations where processing is necessary for: (1) Compliance with guidance from regulatory authorities (2) Compliance with a non-EU legal obligation (3) Regulatory cooperation with financial conduct regulators and law enforcement (where not mandated by EU law) (4) Protection, e.g. protecting the firm against legal claims, or protecting the firm, customers and others against fraud and other crimes Banks will be well aware that items 1-3, at least, are not optional. So they face being caught between breaching the GDPR or not being able to comply with other important obligations. In these cases, firms will need to establish another lawful basis for processing. Weighing up whether it is lawful to process data The GDPR states that it is lawful for a firm to process data if it has a “legitimate interest” in doing so. Legitimate interest will cover many scenarios where firms have wider obligations which could otherwise put them at odds with the GDPR. However legitimate interest has qualifications; the guidance states it can be “overridden by the interests or fundamental rights and freedoms of the data subject which require protection of personal data”. This means if banks are to rely on ‘legitimate interest’ they must first conduct a balancing test between their interests (or that of any third party to whom data are disclosed) and the interests of the data subject. GDPR guidance states that the assessment is not as straightforward as merely weighing two easily quantifiable and comparable weights against each other. Rather, banks must fully consider a number of factors, including context. Public interest may also be a helpful justification. If, for example, they could show processing is for the purposes of preventing and detecting financial crime, or for protection against other crimes, this could be categorised as data processing in the public interest. Banks should deal with each scenario on a case-by-case basis and will need to demonstrate that there is a legitimate interest and that the balancing test is met on each occasion. Banks can continue to meet their regulatory obligations As has been made clear, banks should be able to continue processing data and meeting their wider obligations to regulators in the majority of circumstances, providing they adhere to the procedures outlined. But, it is important to remember these procedures will not be trivial, so firms will need to ensure they are able to dedicate time and resources to carrying them out.

On 7 December last year, agreement was reached on the remaining proposals on bank capital requirements from the Basel Committee, thereby completing the main body of the post-crisis regulatory reforms. While they remain to be implemented, we are now clearly rebalancing away from rule making towards evaluating the effectiveness of the reforms. It is generally acknowledged that that adoption of the Basel rules has made both banks and the overall financial system more resilient. A new post crisis regulatory framework was needed and has been broadly supported by the industry. However, there is not much empirical research available on the actual costs and benefits of the reforms. Instead, policymakers have been forced to rely on forward-looking studies which provide best guesses of what the impacts were likely to be in the future. Nevertheless, the main body of the post-crisis reforms has already been influencing banks’ strategic decision-making, particularly in relation to their capital markets activities. So now is the right time to assess how these reforms have actually influenced banks’ activities in this area. AFME therefore commissioned PwC to conduct an ex post study to examine the role of regulation in the shrinkage of capital markets products. The study draws on data up to 2016 across 13 global banks covering approximately 70% of global capital markets activity. Among the findings was the cost of regulation for capital markets activities was around US$37bn or nearly 40% of total capital markets expenses in 2016. The biggest regulatory impacts have resulted from capital and leverage, but further material effects are likely once the effects of MifIDII/MiFIR are known and the full suite of Basel proposals have been fully implemented. Even before the implementation of these proposals, regulation has helped drive a sharp decline in bank profitability. For example, RoE fell from 17% to 3% between 2010 and 2016 (before banks’ mitigating actions through cost reductions, repricing and capital reallocations raised underlying returns to 11%). Higher regulatory costs and lower returns have also been a significant driver of a 39% decline in capital markets assets since the crisis with particularly pronounced declines in rates, credit, commodities and equities. PwC’s analysis showed that regulatory impacts were by far the biggest factor behind this fall, accounting for around two thirds of the net decline in capital markets assets. Other non-regulatory factors, such as low profitability, economic growth and monetary policy, while not as significant, were nevertheless still important in banks scaling back their activity. With both the implementation of outstanding regulations and other competitive challenges foreseen, asset shrinkage is likely to continue, and profits can be expected to remain under pressure. It is positive therefore that the Basel Committee is revisiting the calibration of certain aspects of its market risk capital proposals and has postponed their implementation until the beginning of 2022. It also encouraging to see the willingness of the Committee and the Financial Stability Board to review the overall effects of the post-crisis framework, alongside the impacts of particular rules on the functioning of specific markets, a process that has already begun. Similar welcome initiatives are in train in Europe and the US to better align regulation so that it more accurately balances the requirement for a resilient financial system with the need to support markets and their users, as well as economic growth. However, these initiatives need to be a shared endeavour in which the industry plays a full part in assisting policymakers to gain a complete understanding of the impacts that regulation has had on business models and market functioning. Only in this way can we together create a better, and ultimately safer, banking system. You can read the full study here

Over the last 10 years few aspects of financial services have been unaffected by regulatory change. In general, the post-crisis regulatory framework has been a force for good in improving standards of conduct and stability across the financial sector. One example is the Senior Managers’ and Certification Regime, implemented by the FCA in the UK and adopted in some form by several other regulators worldwide, marking a sea change in the regulatory approach to decision-making and accountability within banks. But, with the bulk of the new regulatory framework now in place, and industry moving into a new phase of implementation of regulation, the approach to handling new and arising conduct issues also needs to adapt. New regulation, where needed, should continue to play a role in upholding standards, but other approaches can also be effective without placing as much of a burden on both regulators and industry. In recent years, self-generated industry codes of conduct have become an increasingly popular tool for participants across a range of markets to establish best practice for themselves. The Global Foreign Exchange Committee’s Global FX Code of Conduct, which brings together standards agreed by central banks and market participants in 16 different jurisdictions across the globe, is a good example. There are many positive things to be said for industry setting its own standards. Principles can be applied to markets and entities that are outside the regulatory perimeter, and also drafted to a level of technical detail simply not possible with regulation. It is also much easier to update a code to keep pace with changing market practice than to overhaul a piece of regulation. Industry can also choose to exert its own pressure to comply by simply refusing to deal with market participants who won’t sign-up. But, if not devised and implemented carefully, these codes can have their limits. The fact that they are voluntary may encourage firms to sign up to them, but if they are perceived to be lacking in teeth this can limit their impact. If firms are seen to breach industry guidelines without consequences this can damage credibility with the public and with consumer groups, undermining much of the benefit of creating them in the first place. The FCA’s recent consultation, 17/37, has proposed making use of industry-written codes in its supervisory approach to unregulated markets, including publicly “recognising” them. Which suggests that, going forward, they are likely to face much greater scrutiny and play a more significant role in upholding standards - especially if regulators in other jurisdictions decide to take a similar approach. This higher level of scrutiny means that it will become increasingly important that careful consideration is given to how such codes are drafted, that they have buy-in from a wide range of industry participants and that compliance with them can be and is fully monitored. This does potentially mark a shift in approach, as in the past such codes perhaps didn’t face the same level of exposure as they do now. And, in some cases, it might be sensible to take a fresh look at older examples to ensure they are still up to scratch. AFME has identified over 30 codes covering the financial services industry, not including a similar number written by the likes of IOSCO and FSB and aimed at regulators, so this isn’t a trivial task. AFME has always welcomed initiatives that contribute to better market conduct. For voluntary industry codes to be as effective as possible, the aim should be to create standards that are the result of rigorous drafting and consultation, open to scrutiny, maintained up to date, and that industry is committed to upholding. This opinion was first published in City AM on 28 March 2018

The completion of the action plan to put in place the building blocks of a Capital Markets Union (CMU) is due in 2019 - just one year away. While the reasons for needing a CMU in the EU remain unchanged, they have become more important than ever in light of the UK’s decision to leave the EU. The overarching aim, of creating deep and integrated capital markets that drive economic growth and job creation across Europe, continues to be a key goal to work towards. However, in order for the project to meet its stated aims, it has to move to the next phase and with the clock ticking down to the end of the Juncker Commission in 2019, this thinking needs to happen now in order to keep up the all-important political momentum. In this respect, the withdrawal of the United Kingdom in which 46% of the EU’s equity is currently raised, should be seen as a catalyst for its further development, rather than undermining CMU progress made to date. Since the ambitious 33-item action plan was announced, it is clear that some real progress has been made. Among the early actions were a comprehensive package on securitisation to free up capacity on banks’ balance sheets for more lending to the real economy and a new regime for prospectuses to allow easier access to public markets, particularly for SMEs. With two third of the actions adopted or submitted, the Commission has today announced new plans for funding sustainable investment and harnessing the potential of FinTech, among other proposals. The latest initiatives cover some of the most innovative areas for the future of finance; providing opportunities for innovation and investment in enterprises that can tackle the global challenges of the future. FinTech, in particular, has the potential to revolutionise the way both retail and institutional investors invest capital in Europe’s businesses through developments in areas such as crowdfunding, for example. So, the project is still very much on track, but we must also be realistic. Maximising efficiencies in the EU’s internal capital markets will only go so far in increasing their capacity. To be truly transformative, the CMU must unlock investments both from within the EU and the rest of the world to drive economic growth. Encouragingly, Europe’s economies grew at their fastest rate in a decade in 2017 and its employment levels are at their highest. In order to keep fuelling that growth we need to create strong capital markets to complement Europe’s bank finance. To do this, the CMU must provide incentives for investing in equity sources of capital, but also aim to attract new sources of financial capital. In this respect, it is important that both EU and non-EU sources of financial capital can be deployed within the EU, to aid economic and employment growth. In this respect, increasing cross-border risk sharing, creating more liquid markets and encouraging more diversified sources of funding to deepen financial integration have been core objectives of the CMU since the initial plan in 2015. Whatever the final Brexit deal, it is important that third-country cooperation remains a useful tool for a successful CMU. In the next phase of the project, open and globally competitive markets with respect to direct inward investment in loans, debt and equity, as well as to inward investment and cross-border trading activity channelled through banks, insurers, and investment and pension funds, should be given more prominence in legislative initiatives. For example, a regime for third country securitisations would be desirable because the UK represents a good portion of the current EU securitisation market and it is in the interests of the EU to have a market with scale and liquidity. The development and completion of a CMU will still take many years.Launching new initiatives is just the start of the process. The project needs political ambition and commitment to tackle the strategic issues and barriers that restrict the flow of capital both from within and outside Europe, such as reform of Europe's insolvency laws, tax disincentives and the unintended consequences of the impact of new sets of regulation on growth. It would be a tragedy if Brexit upheaval caused the CMU to be left incomplete. In the coming years the CMU action should have a razor-sharp focus on high-impact initiatives that will support sustainable economic growth. This opinion was first published in Milano Finanza, Expansion and Handelsblatt on 8 March 2018

As we enter the new year, banks will already be working flat out on gearing up for GDPR – an EU-wide regulatory package that marks a step change on data protection policy. If 2017 was the year of MiFID II preparations, 2018 will be a time of data audits and system changes to be ready for General Data Protection Regulation (to give it its full title). But even as banks across Europe get ready for the implementation date in May, the prospect of Brexit less than a year later stands to undermine their careful preparations. Transfers of data from one country to another happen as a matter of course for pan-European banks. Firms may have a presence in several countries but will often manage certain functions such as HR or financial crime monitoring from a centralised location. Therefore, being able to freely share personal data is essential for day to day operations. The UK, like all EU member states, will be subject to GDPR rules from 25 May 2018, and cross-border data transfers will be able to continue as normal. But when the UK leaves the EU just 10 months later in March 2019, that could create a significant problem. At that point the UK becomes a ‘third country’ (in the technical jargon), which means its data protection framework will no longer automatically be deemed sufficient by EU regulators. This could pose a significant challenge for pan-European firms that have built their business models around operating across the EU27 and the UK. Without overcoming some pretty stringent legal hurdles firms would have to stop transferring data or face hefty fines for non-compliance. A cliff edge can still be avoided. But for this to happen the EU27 and the UK must take advantage of a mechanism within GDPR that would allow EU27 and UK regulators to approve such transfers. If the European Commission deems a third country to have an ‘adequate’ data protection framework in place, then data transfers between Europe and that third country could continue uninhibited. Given that the UK will have such a similar legal framework to EU data rules (indeed, the EU (withdrawal) Bill will ensure that the UK will continue to comply with GDPR rules even after it has left the EU) there is a strong case for the Commission to agree to such treatment. The UK should also agree the same in reverse to enable UK-EU data transfers. The alternatives, such as amending contracts to permit cross-border data transfers, will put the onus onto individual firms to make appropriate arrangements, which risk not being put in place in the time available in the run-up to Brexit. This will create a huge amount of extra work and complexity, and could also leave institutions open to legal challenges. It would also come at a time when firms had already put significant effort into complying with the GDPR rules, as well as grappling with other causes of Brexit disruption. In short, mutual adequacy would be a simple, robust and all-encompassing solution in an area where the UK and EU27 will have very similar legal frameworks. Time is short to get agreement, so both parties should press ahead. Both sides should begin adequacy assessments as soon as possible and data transfers should be included in any transitional arrangements to ensure there is no cliff edge on 30 March 2019. Otherwise, what on the surface could seem a relatively arcane issue, could cause significant operational problems. *This opinion was originally published inCity AMon 1 February 2018