Looking ahead at the EU financial services agenda
Luxembourg’s Finance Minister, Pierre Gramegna gives an insight into what’s in store for 2018.
LFF: BREXIT NEGOTIATIONS ARE TENSE, AND IT NOW SEEMS UNLIKELY THAT THE UK WILL REMAIN IN THE SINGLE MARKET. WHAT IS YOUR VIEW ON THE CURRENT TALKS AND LIKELY OUTCOME?
It is clear that the UK cannot keep full and automatic access to the EU single market while exiting from the EU. There will be access, but we have to define which type of access.
When you look at the global picture, in the field of financial services, automatic market access is much rarer than it is for goods or other services. Banking and financial services have always had to live with lots of barriers worldwide. The EU single market is an exception. Business can and will find solutions. For instance, if you set up a subsidiary somewhere in the EU, then you can have access to the EU single market. Key Swiss banks have chosen Luxembourg as their EU hub, and this is what British players can do too, in order to retain access.
Key Swiss banks have chosen Luxembourg as their EU hub, and this is what British players can do too, in order to retain access.
If we are smart on both sides, we will try to define a bilateral relationship that goes beyond the mere application of the World Trade Organisation rules. When you look at CETA, the trade relationship set up between the EU and Canada, it entails not only provisions on goods and services but also has rules on social laws and environmental issues. Building on this experience, the EU could elaborate a specific type of agreement with the UK, even more elaborate than the one we have with Canada. It could be a “sui generis” relationship agreement, but that needs to be worked out, and that will be a long and tedious negotiation to go through. That’s why a transition period is warranted.
LFF: WHAT OTHER POINTS ARE DOMINATING THE AGENDA THIS YEAR IN THE EU AND THAT ARE RELEVANT TO FINANCIAL SERVICES?
I see two major topics. The first one is the deepening of the Capital Markets Union (CMU), together with the completion of the Banking Union. The second dominating topic this year is tax. The US tax reform lowers corporate tax rates substantially and implements a series of OECD BEPS recommendations. Yet, some measures also seem to discourage imports and encourage exports. It remains to be seen in what way these new regulations are compatible with World Trade Organisation rules.
LFF: CAN YOU EXPLAIN HOW THE EU BANKING UNION PROGRAM IS DEVELOPING?
There are two topics that the European Council has nailed down as being the ones where progress must be made. The strengthening of the European Stability Mechanism (ESM) and the completion of the Banking Union.
We need to make sure that we all play by the same rules in financial services, that's the biggest challenge.
With regard to the Banking Union, good progress has been made in reducing risks in the banking system. Sufficient risk reduction is crucial before further steps can be taken in the area of risk sharing, the backstop of the Single Resolution Fund (SRF) and a European Insurance Scheme. A second priority is the strengthening of the ESM. Headquartered in Luxembourg, the ESM has worked very well since its inception and everyone recognises that.
It could play an important role in crisis prevention, in the development and monitoring of any future support functions. The ESM could also act as the common backstop for the SRF.
LFF: CAN YOU EXPLAIN NEW AREAS OF FINANCIAL REGULATION?
The agenda is always very cumbersome, and we have gone through lots of regulations in the past couple of years. The 2018 EU agenda is massive. For instance, the Commission has recently tabled a FinTech action plan, as well as green finance pack age, which are both areas of great interest for the Luxembourg financial centre. But there is nothing in my opinion that is as important as the two subjects I mentioned before, which are the tax reform in the US and its implication, as well as to make sure that we have a regulatory level playing field, both inside the EU and all over the world.
The digitalisation of the economy is there to stay and is going to be for me the most crucial topic of 2018.
LFF: DOES EUROPE HAVE PLANS TO ADD A REGULATORY FRAMEWORK TO CRYPTOCURRENCIES?
This is a topic which has generated a lot of attention. As the President of the European Central Bank (ECB), Mario Draghi, and others have said recently, cryptocurrencies are there to stay, so we need to deal with them. The innovations brought about by cryptocurrencies regarding the speed of payments and efficiency are evident.
I am also pleased that the Luxembourg Parliament has very recently had a first debate on cryptocurrencies, and will continue to study the related issues in the months ahead.
And beyond cryptocurrencies, there is an important potential in the underlying concept of ensuring traceability through the blockchain. However, there are issues with fraud, anti-money laundering, and topics like consumer protection and “know your customer” that need to be looked at very carefully. We have a partial solution in so far as the EU payment services directive applies, but that doesn’t cover the full scope of issues that are at stake.
The G20 has launched an initiative for more checks and balances. We as Luxembourgers are going to follow this very carefully together with all the other European countries, and if more regulation is needed, we are very open to discuss that. In this context, I am also pleased that the Luxembourg Parliament has very recently had a first debate on cryptocurrencies, and will continue to study the related issues in the months ahead.
LFF: THE DIGITAL ECONOMY IS IMPACTING FINANCIAL SERVICES. WHAT SHOULD WE EXPECT THIS YEAR?
I think there is going to be a significant issue about taxation of the digital economy. The role of the internet and digital solutions in today’s economy and how these are influencing the rest of business, be it in trade and services, but also in the financial industry is going to loom in the coming months.
FinTech is already becoming an essential pillar of our financial centre, next to our three main sectors which are private banking, investment funds and insurance.
The digitalisation of the economy is there to stay and is going to be for me the most crucial topic of 2018. That’s why we have launched the Luxembourg House of Financial Technology (LHoFT), because FinTech is already becoming an essential pillar of our financial centre, next to our three main sectors which are private banking, investment funds and insurance.
So, I am very glad that we are successful in attracting FinTech companies to Luxembourg. FinTech is a challenge because it is disruptive for traditional players, but it is also an opportunity to diversify and develop our financial centre, and help existing players become more competitive.