The U.K.'s Financial Conduct Authority has criticized the European Union markets regulator's new plan on where shares are traded after Brexit and called on it to recognize the "reality" of open markets.
The European Securities and Markets Authority has pulled back from new rules it introduced in March that would have prevented EU banks and fund managers from trading shares in companies such as Vodafone Group PLC, BP PLC, and GlaxoSmithKline PLC in the event the U.K. exits the bloc without a deal.
ESMA's original plans restricted EU banks and investors to trading shares in 6,200 EU-incorporated and U.K.-incorporated firms to within the bloc, even if the U.K. was the main stock market listing of a British or EU company. Critics warned it would lead to fragmentation of markets and liquidity.
Now ESMA has said that its proposed new rules will only apply to EU companies and not to the 14 British-incorporated companies that are also traded in the EU that it had included in its previous guidance.
Support for reciprocal equivalence
However, the FCA said ESMA's plans would still cause disruption to investors and other market participants, and lead to the fragmentation of markets and liquidity in both the U.K. and the EU. Under the change, shares in a company incorporated in the EU can still only be traded by banks and fund managers within the bloc.
"The FCA believes in open markets and competition between trading venues and that reciprocal equivalence, which reflects reality, remains the best way of dealing with overlapping share trading obligations," said the FCA.
It suggested that in the absence of an agreed equivalence regime, a temporary regime allowing both sides' regulatory standards to apply might be a way forward.
The FCA said that some shares of companies incorporated in the EU were listed in London, which was their main or only significant center of market liquidity and ESMA's move to determine where a share can be traded by European investors on the basis of where the company was incorporated was a retrograde step.
"This approach would place restrictions on a company's access to investors and freedom to choose where they seek a listing on public stock market," said the FCA. The British regulator said ESMA's changes had not lessened the risk of disruption.
"Consistent with our objectives and the principle of best execution, we would want to ensure that markets in these shares currently available to both U.K. and EU investors in London would not be damaged."
The FCA reiterated its support for "reciprocal equivalence" in its post-Brexit dealings with the EU whereby each side recognized the others was regulated in the equivalent way.
However, as yet, there is no agreement between the two sides over future regulatory arrangements after Brexit.
ESMA claimed it was doing the maximum possible to minimize disruption within legal constraints. It faced a storm of criticism for the move including from Sebastien Raspiller, head of financial services at the French Treasury, who said "the decision is not good" and urged the regulator to reconsider its position.