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From the library of the New York Stock Exchange at the corner of Wall and Broad streets in New York City, you're inside the ICE House. Our podcast from Intercontinental Exchange on markets, leadership and vision in global business, the dream drivers that have made the NYSE an indispensable institution of global growth for over 225 years. Each week, we feature stories of those who hatch plans, create jobs and harness the engine of capitalism. Right here, right now at the NYSE, and at ICE's exchanges, and clearing houses around the world. And now welcome inside the ICE House, here's your host, Josh King King of Intercontinental Exchange.
Josh King:
This month, as all fans of Outlander know, we mark the 275th anniversary of the Battle of Culloden in the 1746. The final confrontation of the Jacobite rebellion, where Scottish Highland clans under Bonnie Prince Charlie succumbed to British forces, led by William Augustus, the Duke of Cumberland. After early victories in Edinburgh and Prestonpans, Charles Stuart, the Bonnie Prince, could have taken his army of Scots all the way to London had not the Redcoats recalled 12,000 regular from the continent to put down the insurrection resulting in 2000 Scots killed or wounded, effectively putting an end to the highland's culture and way of life. The only thing that most of must have left are single malts.
Josh King:
270 years later, in June 2016, Britain began its March to leave the continent again. This time through a referendum rather than the movement of troops. That moment, five years ago, in which 52% of voters opted to leave the European Union, was far more surprising as markets reacted to the Dow Jones Industrial Average dropped 610 points or 3.4% to end of the day at 17,400. While many said the British culture and way of life might suffer from being severed politically from Europe, markets, they shrugged it off. The Dow is double what it was five years ago, and by judging how Britain weathered COVID next to its neighbors across the channel, perhaps the Brexiteers were onto something after all. But getting to the end state would be as hard as a slog through the Scottish MOS.
Josh King:
From that day in 2016, began three and a half years of negotiation, discussion and debate. The comedians made their jokes, the papers printed their headlines, and the politicians were in constant conversation with counterparts in Brussels during what became known as the transition period. Questions of deal or no deal were constant, but finally, the day came at 11:00 PM, Greenwich Mean Time on new year's eve, December 2020, the transition period ended and the UK was out. And yet that's not where the story ended, not by a long shot. The headlines have continued to talk about Brexit with a high fever.
Josh King:
Just this week, the bankers in the UK say they're being left out to dry while negotiations over the so-called "equivalence" hasn't progressed beyond a memorandum of understanding with Brussels. And British chocolateers are having a hard time exporting their suites to the continent, and clothiers, florists, and purveyors of sausages are similarly struggling. Even the delicate political balance in Northern Ireland has been shaken in recent days by violence, as a new UK-EU trade deal has imposed customs and border checks on some goods moving between Northern Ireland and the rest of the UK.
Josh King:
In response, Amsterdam, the once the financial center of the world, has seized at the chance to sell itself once again as the financial center for the EU, a bid to take back the European crown it first lost to London nearly three centuries ago. But London, it's not going away quietly. The UK believes firmly it's able to control its narrative and shape its future. The stakes of the outcome may be greater indeed than the question of whether the Stuats could restore their place in the British Monarchy.
Josh King:
Where Brexit came from, and where it takes Britain from here, is our topic for discussion with today's guest, The Accidental Brexiteer, Barney Reynolds, partner at Shearman & Sterling. One of the world's top law firms, where he also holds the position of Global Head of the Financial Services Industry Group. He's also a member of the firm's executive group. Our conversation with Barney Reynolds on All Things Brexit will begin right after this.
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Josh King:
Our guest today, Barney Reynolds, is a partner at the law firm of Shearman & Sterling, where he specializes in all things impacting financial markets. Barney Reynolds studied law at the University of Cambridge. After completing his studies, he joined Shearman & Sterling where he's worked for over 18 years. His voice is well known throughout the city of London having penned seminal documents and books on the future of financial services following Brexit, including The Art of the No Deal: How Best to Navigate Brexit for Financial Services. Barney Reynolds, welcome inside the ICE House.
Barney Reynolds:
Thanks for having me Josh King. Nice to be here.
Josh King:
So, perhaps there's a future for you in chocolate smuggling if this financial services law thing doesn't work out for you?
Barney Reynolds:
Does it?. I don't think I have any special skill in that. But I'm positive on Brexit so I don't think it'll come to that.
Josh King:
So, where were you five years ago this coming June? Bring us back to that moment for you.
Barney Reynolds:
I was quite happily advising clients in the financial institutions around the world on city of London and European legal masses. And then the referendum came along basically.
Josh King:
You certainly made a for yourself in the half decade since as The Accidental Brexiteer, but what drew you to the law before that point, and how did your specialization narrow into financial services?
Barney Reynolds:
Well, I did a law degree, I was in interested in becoming a lawyer quite young. In our country, you can either go into the law by doing a law degree and then carrying on, or you can do something else first and then go into law. I knew I wanted to do something related to the law. And then just started practicing and learning the skills. And have enjoyed it and never looked back.
Josh King:
Is there a particular aspect of financial services law that grabbed your attention that really drew you in?
Barney Reynolds:
I love the way that it's sort of plumbing of how everything works, and it's constantly evolving, it's hugely complicated. But underneath it, are all sorts of pro-business elements. And I love the way that the ones that the intellectual part of sort of shaping how the markets operate.
Josh King:
Many factors contributed to the eventual outcome, Barney Reynolds, with people deciding based on their views on issues ranging from immigration to legal autonomy, which you and I have talked about in the past. If you had to sort of tick off the top factors leading to Brexit, what would you say they were, and why did they drive that majority to 52%?
Barney Reynolds:
I think it's about sovereignty. I really do. I think the population, the public ultimately wants to be in charge of their own affairs, and it's about democracy as well. Because the Westminster Democratic System is centuries old, tried and tested, it works very well. People have a very direct say in who represents them and in deciding on which views to support, and people get removed very quickly if it goes wrong.
Barney Reynolds:
The EU system has elements which try to sort of import democracy into the EU architecture with the European parliament and so on, but it's far less directly connected to the people than the Westminster system. And I think that's ultimately what drove it. Obviously there were other topics very much under discussion at time, immigration being one of them.
Barney Reynolds:
And I suppose the point, I see that as a sovereignty point as well. The point there was, the politicians were basically being told by a large segment of the public to do something about it, and the EU law said you can't do anything about it. And David Cameron, the Prime Minister at the time, went over to Brussels to try and negotiate a change to the EU arrangements, so that the UK government could apply some sort of emergency break on immigration, and effectively that was brushed aside by Brussels.
Barney Reynolds:
And so, I think it was a sort of indicia, it was indicator of lack of preparedness of the EU system to accommodate direct democracy from the UK. And I think that really was the sort of spark perhaps. But I think it represents a far bigger underlying point, which was there all along and was only getting worse. In fact, I suppose the other point was the continent of Europe is integrating fast to have a twin speed, EU developing to some degree anyway because of the Eurozone. So, after January reunification and the construction of the Eurozone, the Eurozone was becoming almost a sort of block within a block in its own rights.
Barney Reynolds:
And another thing which Prime Minister Cameron had tried to do was to negotiate a relationship between the Sterling area and the Euro area within the EU construct. And that was, to my mind, not finished business, and it was not a satisfactory outcome, it was a right to negotiate. So, I think there was an emerging split coming from that down the line as well. And we are seeing all the issues in the Eurozone, which would not be the UK's issue. So, within the EU construct, I think we'd be having somewhat similar discussions on some topics anyway, even if the UK had voted to stay in by some narrow majority.
Josh King:
So, before we dive in much deeper to the work of Mr. Cameron, Mrs. May, ultimately Mr. Johnson in the last five years, let's take a little bit of a sidebar and talk more a little bit about this esteemed firm that you work for; Thomas Shearman, John William Sterling founded a litigation practice that represented one of the robber barons, Jay Gould, and also the founder of the Assembly Line, Henry Ford. Today it has about 850 attorneys under Senior Partner David Beveridge. Talk about your firm for a minute.
Barney Reynolds:
So, it's as you've indicated, a New York headquartered firm. It's a global law firm with a long and storied history, having worked on extraordinary number of very famous deals and developments in law all over the world. Played a role even in the Iranian hostage crisis, finding a route through for various payment flows there and securing of monies. So, it's a wonderful firm. I've been very ever since joining in September, 2002, haven't looked back.
Josh King:
So Barney Reynolds on June 24th, 2016, you published a client publication for Shearman & Sterling in which you wrote, and I'm going to quote you here, "One key element of any deal from a financial services perspective will be the status of financial services passports." So, the discussion of passports, with the term evolving somewhat over the years, has really been at the heart of the debate from the start, hasn't it?
Barney Reynolds:
Yes. So, within the EU legal architecture for financial services, starting in 1989 with a sort of prototype and early version, and then really taking off since about 1999, and then sort of cemented after the financial crisis, there's been a rolling out of Pan-EU regulation, which has supplanted national law and regulation for financial services. And that includes in the City of London in the UK. UK obviously having played a big part in writing that, but not the sole part as a committee based construct effectively. And the idea of the passport is that, a financial firm set up in one member state, can operate across the whole EU. And as the passports evolved, it operates under one rule book across the whole EU, overseen by the supervisor in the place where it's incorporated.
Barney Reynolds:
And that architecture obviously fell away on Brexit. There's something I talked about in the run up to the referendum, having to be looked at and thought through. And the PCO sighting was where I started writing about solutions. Yes, on Brexit, we'd be moving out of the architecture of EU law and regulation and out of the passport infrastructure. Question is what would be best for financial services based in the City of London afterwards?
Josh King:
As we've been having our discussions over the last few weeks, Barney Reynolds, this charm has come into my head, as the Accidental Brexiteer for you. You're not sort of greatly politically motivated, you look at this from a basically law and financial services perspective. What were your views on the European Union probably before the referendum, and how did your career shape them up to that point?
Barney Reynolds:
I've always been Euro-skeptic, and in fact my work in the financial services sector and in EU regulation, and the sort of weeds of some of the detail stuff which involves the collaboration with other states in creating the passport regime, made me even more skeptical than I naturally was, I think. Because I saw the way in which law and regulation is used for political purposes in continental European country, many continental countries. And I've started to reflect on why that was.
Barney Reynolds:
And I think, at root part, of it is to do with a fundamental difference between the Common Law, UK way of thinking, and Scott's law, not materially different in this context, which is basically bottom up, sort of case by case iterative, pragmatic, and instinctively respects the idea of a market. It intervenes only when there's something to intervene on. And the Civil Law top down codified thinking that originated principally in France and Germany in the 19th century, which is more controlling, perhaps more consistent within a capitalist way of thinking, which seeks to control the market and uses law and regulation as a vehicle for political choice.
Barney Reynolds:
And I saw that in the discussions around the creation of the EU regime and the big tensions there, and the different ways of thinking about the market. And I think those tensions have only got more acute, and I think it became even more obvious with the construction of the Eurozone and the attempts by some countries in the EU to control the Euro currency through controlling clearing of the euros, through floating the idea of a financial transactions tax to recoup the costs, those costs as they saw it from the financial markets, or at least skim off some money from the markets and redistribute those. It was a very different way of thinking and I could see those tensions bubbling up.
Josh King:
The Brexit negotiations have been long and fraught as we talked about in the introduction, it's a topic stretching really across the tenures of three prime ministers with bills and EU withdrawal deals, failing to pass parliament due to a lack of consensus among the UK's politicians. Those three prime ministers, Cameron, May, Johnson, all conservatives, how have they each handled, in your view, the prospect of leaving the EU?
Barney Reynolds:
Well, David Cameron's approach was very normal, I think, which was to seek to renegotiate the EU construct to some degree. Not enough as it turned out. I didn't think it was gonna be enough at the time to satisfy the British public. And very minimal changes were in fact agreed to by the EU as part of that process. But he and those helping him, believed that the EU could be fixed with some adjustments. Some of those adjustments were sort of rights to carry on negotiating and talking. So, it would have been an evolutionary discussion on the current architecture. But I think personally, as I've mentioned, I think, the two sort of ways of thinking are too far apart for that really to have worked.
Barney Reynolds:
The second approach was the most extraordinary of Theresa May's premiership, where she tried to sort of square the circle. I'm not even sure whether one could describe it as achieving Brexit fully, because it would've involved the UK adopting EU law, EU foreign law, and the adjudication of a foreign court and a foreign executive authority in the context of the European Commission for State aid. Which to my mind, is an extraordinary idea. If you put the idea to the US or any other normal sovereign country, that they would take someone else's law, I think they'd laugh you out of court. So, that was an extreme moment I think for us, and it was rejected by parliament three times, thankfully.
Barney Reynolds:
So, our democratic system held up, the Checks and Balances held up. and so effectively the executive branch was unable to deliver on what I think was a sort of steamrolled approach pushed by the EU in order to try and avoid what was termed a Hard Brexit. I don't think that was anything to be afraid of, but a lot of people were. Theresa May's government clearly decided they wanted to avoid it. So, they were prepared to sign up for this extraordinary thing, but parliament rejected it, thankfully.
Barney Reynolds:
And then now, Boris Johnson's government, I think is a very sensible and strongly led government, which is looking for sovereign to sovereign arrangements as being the solution. And so, for the trade and corporation agreement agreed this year, roughly the end of last year which came into effect this year, you see a normal free trade agreements between the UK and the EU, which is a basis for future discussions. I'm sure it can be improved upon, but that's normalized. So, that's how I've see those things.
Barney Reynolds:
And so, there was in a way a side track that we took for the Theresa May administration, for the duration of that, which was somewhat extraordinary. And I think in legal and constitutional terms, it was particularly extraordinary and it was a complete dead end. And I suspect never happened if Boris Johnson had been elected that first time round. I think we probably got to the right result, a sovereign result, much, much more quickly. Possibly even had a US trade deal in place by now, but anyway.
Josh King:
Let's talk about your role in all this, Barney Reynolds. The Star Chamber was originally established in the 15th century as a court consisting of judges and privy counselors. Its purpose, at the time, was to supplement the regular justice of the Common Law courts. It was abolished in 1641, resurrected in 2019 by the European Research Group to advise and comment to the then Prime Minister, Mrs. May, on the Brexit deal. You were enlisted as a member of the Star Chamber. Can you tell us more about it and the work that it entailed?
Barney Reynolds:
Well, I didn't have any hand in naming it. It's obviously nothing to do with the original Star Chamber. And it's like joke title I think. I mean, in the sense that it's just a legal advisory group for backbench MPS who wish to evaluate the sort of agreements reached between the UK and the EU and other legal issues arising on Brexit. And so, in particular, in the context of the May agreements presented to parliament, they wanted independent advise on what those actually achieved, because there was a huge concern as to whether or not they gave up sovereignty in various respects, which they did.
Barney Reynolds:
And then the final sort of era of the legal advisory group, which I'm proud to have been a member of, was at the end of last year when it was reconvened to look at the Boris Johnson trading corporation agreement. For all I know, to be convened again to look at any future not Northern Ireland arrangements, not the sovereignty arrangements. But essentially, it's to look at sort of structural legal points between the two countries, two jurisdictions rather, and advice backbench of MPs before they decide how to vote.
Josh King:
So, you say it could be convened again. I'm curious in your view, what are the areas that are still require finessing such as equivalents?
Barney Reynolds:
Well, so you've touched on one financial services. There will need to be an arrangement of some sort, and I think it will be enhanced equivalence and arrangement. I actually came up, I conceived, originated and created treaty and regulatory text for the UK government, then adopted it in 2018 as its policy, is still is the policy. That will potentially need to be looked at if some arrangements produced along those lines. At the moment, the EU are showing inclination to do that.
Barney Reynolds:
There are unfinished points of business in relation to Northern Ireland, as Northern Ireland protocol encroaches unacceptably on UK sovereignty, which is why also in my view, it's an unstable arrangement for the Irish people. And there are some other ones, for instance, systems rights where the role of the ECJ lasts indirectly for up to 100 years, a questionable arrangements for the sovereign basis in Cyprus, and the role of the ECJ in relation to various other aspects of the withdrawal agreement. So, there are points to be cleaned up. That's my question.
Josh King:
The UK had granted equivalence to Switzerland's trading venues. What do you think are the benefits of this for the UK?
Barney Reynolds:
So, under the equivalence architecture, which the UK was key in conceiving and then rolling out in EU law, and is therefore part of inherited UK law, because at the point of Brexit, from the beginning of this year, all the EU Key, as it's called, the EU body of law was adopted into the UK. And therefore we have equivalence provisions like the EU did or does. The provisions allow the recognition of certain jurisdictions and rules and certain jurisdictions, so that instead of providing restrictions on the access of businesses under those foreign laws to the UK, you sort of effectively allow full access, recognizing the efficacy of those laws and the regulators managing the application of those laws so as to allow people to trade here.
Barney Reynolds:
Now, it's a much smaller point in relation to the UK than it ever is for the EU. Because basically, the UK has the most open market in the world of any major market through its so-called Overseas Persons Exclusion, which allows people to interact with market participants anywhere in the world without the UK seeking to regulate those other participants as a general matter. The equivalence regime for share trading and so on operates under the inherited EU key. Whether we should bother with equivalence mechanics for some of these things going forward is an open question. I suppose, they provide bargaining chips for the EU negotiations for financial services over time. But I think the UK's history of allowing people here to trade wherever they want on a caveat emptor basis in the wholesale markets is the best way forward actually.
Josh King:
So, now that the UK has left the European Union, do you see the UK having to adapt its regulatory regime? What's the future? What do you think the future will be for financial services in the UK?
Barney Reynolds:
So, this goes back to the law. The Common Law system, there are three main legal systems in use around the world on which everyone else is basically modeled. There's the Common Law system used in the US and the Commonwealth and obviously the UK. That's the codified French version of the Civil Law system used in a number of countries around the world. And then there's the Codified German law system used in other countries around the world. Some countries amalgamate those two to some degree. China and Japan for instance, have systems based in large part on the German code system. In China's case with Soviet law in there as well, and some other influences. So, those are the three systems people have developed and found to be best ways of interacting and organizing society in the world.
Barney Reynolds:
The EU system basically has ended up adopting the Franco-German codified model. And the way that works is that, you have a code which covers every area of activity pretty much, or legislative sort of framework, and rules covering every aspect of activity. And so, for financial services, further to the Financial Services Action Plan of 1999, we now have a single EU, and further steps taken subsequent to that. We have a single European or EU rather rule book, which covers all of financial services, with a rule for pretty much every financial services type of activity. And this method brings with it certain consequences.
Barney Reynolds:
So, when a new thing happens, new development like crypto, Bitcoin, or whatever, there's a full time secretary at the European Commission that we'll be looking at the market, seeing whether something new's coming up, and writing a new block of code. It's like a bit of software that constantly gets updated; iOS 10, or whatever, 10.1, 10.2. But the common method law method is completely different. It's bottom up, and there's a massive deference to the independent judges to produce Case Law precedent.
Barney Reynolds:
And they delineate effectively what is permitted. And then you can extrapolate from that, with astonishing degrees of predictability, to what would happen in a new situation if you want to do something innovative. And then on top of that, you have regulators who make rules and legislators that make laws, but they do so in a light touch way, where they focus on specific mischiefs. And you are obviously familiar with this from the US.
Barney Reynolds:
But there's a very, very stark difference in method. And the EU method, which we've been part of, and we made work sufficiently whilst within the EU for financial services, although I foresaw problems ahead with the Eurozone set up in particular and mission creep of this method, we've taken in the point of the beginning of this year, all relevant EU financial services law. And so, what I think we need to do is lift off that blanket of code from the UK system, and rewriting, and replacing, leaving us with a Common Law based financial regulatory system, which would have the benefit of all the certainty, legal and regulatory certainty, you get from the Common Law method and predictability, which avoids you doing something which you have to do under the codified system, which is constantly asking officials for permission to do things.
Barney Reynolds:
In the Common Law system, you can go to a private practice lawyer, or you can evaluate for yourself whether it's something's permitted on the basis of the precedent, and then you can go and do it on basis that you'll have equal treatment, and your arguments will be given equal respect to them in the courts.
Josh King:
Taking the long view, what are the economic opportunities facing the UK in your view now that Brexit has occurred?
Barney Reynolds:
Well, there's a lot of economic research by people like Cross, LaPorte, Mahoney, and so on. Actually American principally, economic research, to the effect that the Common Law system leads to significantly greater economic growth than the Civil Law code based system. Because the method, and it's explained by the method. The code jumps has to keep jolting to catch up with market developments. And in areas which involve considerable innovation and intellectual energy, where people want to be able to innovate, they want to know that if they do X, Y, and Z, they can actually do what they're wanting to do, the Common Law system provides you with that certainty. And so, it tends to coincide with greater levels of innovation.
Barney Reynolds:
And that's the prize, in my view, for the UK to recapture that. We had it in the 19th century. I think it's relevant far more now in a services based world than an industrial one. For financial services, there's a constant adjustment going on, and you want to minimize the moving parts and make it as clean, as simple as possible. Allow everyone's intellectual effort to be focused on where real risk is and what really matters. The civil system, by defining rights, as well as obligations and putting them intention with each other, by just jittering to keep up with the market, always being behind. Innovators tend to disengage from that environment, and that's the benefit. And the economic research based on that.
Josh King:
So, greater levels of innovation are in the offing for London's future as a financial center. Barney Reynolds, Amsterdam overtook London as the center for share trading. We've also heard the phrase Singapore on Tims mentioned frequently in regard to London's potential evolution. What do you think will happen to London?
Barney Reynolds:
Well, Singapore on Tims is shorthand for a Common Law highly competitive market economy. And I very much hope we go in that direction. But obviously Singapore has a lot of other things that go with that. UK makes its own political choices, so, it's only a shorthand reference, I don't think it's accurate as to what the destination would be for the UK. EU law said that EU companies shares have to be traded in an EU exchange, and then, people, on that particular topic, chose Amsterdam. There is no one EU financial center. I think what the UK needs to do is embrace its legal and regulatory method. I think that will bring more innovation.
Barney Reynolds:
I think the other factor that will change the whole market very considerably as well is that, at the moment, wholesale services can be accessed from all over the world in London, subject to any local law restrictions on their systems and so on. But they can be accessed very easily by sophisticated players, and they can set up a place of business here, they can use reverse list station which is a concept of reaching outside your laws and only being subject to the protection to the UK system, which are obviously in my view, frustrate.
Barney Reynolds:
The consumer is going to be able to access the UK's financial services from anywhere in the world on smart devices in ways which I don't think countries are gonna find it sensible to try and do anything about. And so, so long as the UK maintains a trusted reputation for hosting high end financial services providers that constantly deliver value and have the best liquidity and products, then I think you'll see, in the retail market, the same thing as we've got in the wholesale market. And I think that's the biggest prize available to the UK.
Josh King:
Pursuing the biggest prize available after the break. Barney Reynolds partner at Shearman & Sterling will move beyond London to talk about some of the broader issues in global financial services, always as it has to be against the backdrop of the economic and legal revolution we've been witnessing in these past five years. That's coming up right after this.
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Josh King:
Welcome back. Before the break, Barney Reynolds, partner at Shearman & Sterling and I were discussing the future of the UK's financial services sector following Brexit, as well as the opportunities now available to the UK following its departure from the EU at the end of last year. So, Barney Reynolds, I suppose it's a truism that all lawyers are writers, but you've taken this all to a new level. You've written four books on Brexit, A Blueprint for Brexit, A Template for Enhanced Equivalence, The Art of the No Deal, that's my favorite title and Free Trade in UK-EU Financial Services. I'm curious, what's your writing process and who are you writing it for?
Barney Reynolds:
After the referendum outcome, as you mentioned earlier, I started writing things, explaining what the way forward was for financial services. In fact, the very first thing I wrote was for Thomson Reuters and it just triggered a sort of deluge of pieces from other people saying, oh, no, this can't be done at all. Essentially, I said that the two ways forward for financial services in the UK were either some sort of enhanced equivalence based model based on the concepts we talked about earlier, but improved upon, or a financial center model and that's where people bring in the Singapore analogy, but I think that's somewhat natural, but where the UK does its own thing and customers come to the market. But it triggered a huge amount of reaction from other people saying this is just not right.
Barney Reynolds:
And so, I then wrote The Blueprint for Brexit in November 2016, setting out these two models in some detail. And then people said, no, no, no, you can't do enhanced equivalence, you'll never get that to work. So, then I wrote A Template for Enhanced Equivalence, which came out in July 2017. And then they said, well, but there's no plan B, there's no alternative if that's not accepted by the EU. So, I then wrote The Art of the No Deal for November 2017. And then in the meantime, then the government decided to accept, in fact, shortly after that, The Template for Enhanced Equivalence concept as government policy.
Barney Reynolds:
And then people said, well, you've got no leverage. There's no reason the EU will agree to any of this in terms of your deal. I quite like the idea, but it's never gonna be agreed to. So, I wrote Managing Euro Risk. I co-authored that with an economist and a financial analyst. And that, in March 2019, essentially explained how the Eurozone is constructed in a fatally dangerous way that creates risk, which then offloads onto the rest of the world. So, effectively, it's operating at the rest of the world's expense. And so, what I explained in that, was how the UK has been mitigating that risk on behalf of the world through Bank of England Stress Tests and Top Up capital requirements on businesses here, acting as a shock absorber for that risk. But everything would change after the end of Brexit with the withdrawal of the passport, which is why the EU needs to accept enhanced equivalence, because then the UK can carry on mitigating that risk.
Barney Reynolds:
EU doesn't recognize, let alone manage or mitigate any of this risk itself. And the US, until that book came out, I don't think had really appreciated it, because it wasn't factored into US stress tests. And then people said, but there's no real upside in doing anything differently. So, that's when I did Restoring UK Law, which just came out in February this year, which sets out what I think we need to do, the difference between the Common Law and Civil Law code heritage and what we need to do on that. So, that's kind of why you are calling me an Accidental Brexiteer. Sort of, it became. The referendum happened, I started writing, and it led to this chain of events where I just set out one thing after another. But no, I hadn't set out to be an author to that degree at all before.
Josh King:
Your mother is a violin teacher, you are an accomplished cellist, you're thinking about bringing readers on a journey from the first note of a publication to the last word. How does your appreciation of music play role in creating a narrative on the topics that you're writing about?
Barney Reynolds:
There was a connection with music, which is that, it's orchestral in a way, writing, I think because the analysis needs to sort of reach a crescendo and fit together. There needs to be a reconciliation of the various tunes and sub tunes and counterpoints and so on. So, I think there is a resonance with music.
Josh King:
In your work beyond this, Barney Reynolds, you've delved into the creation of entirely new legal and regulatory regimes. For example, at Abu Dhabi Global Market in the UAE, an international financial center operating under the English Common Law system that you and I have been talking about, which is also now home to ICE's newest exchange, ICE Futures Abu Dhabi, what considerations have to go into a process like that, bringing a new legal and regulatory regime to an entirely different sovereign place?
Barney Reynolds:
There's a general trend which I should perhaps touch on first. Many countries, developing countries around the world and developed ones, are looking to lower on regulation and how that can be a competitive advantage, or it can be more market friendly. And then looking at carving out regions or bits of the State through experiment with that. And they've always been sort of special, for a long time now, decades, been special economic zones. The Abu Dhabi one is a financial free zone. So, in fact, in Dubai, is DIFC, Dubai International Financial Market, and there is one in Qatar, this one in Astana, in Kazakhstan I suppose. And the question that is, which is gonna be successful and why? And ADGM, which I'm very proud to have been involved in, I led a team drafting the laws and regulations for ADGM, and we introduced the Common Law, in its entirety, the first time it's ever been done in a non colonial context to a country.
Barney Reynolds:
With all the benefits that brings that we've discussed, it requires a massive leap by a country and the UAE I think has been very innovative in deciding for themselves that the Common Law was the best system to adopt. And not everyone around the world, I mean, I've been involved in all sorts of other ones where people are more reluctant to make that leap. The Gulf generally is based on French-Egyptian law, sort of code-based law. There are other parts of the world, there are bits of South East Asia that have code based law based on the French model, many of them. And then not so keen to make that leap, it does mean letting go. It basically, to some extent, involves federalizing the country.
Barney Reynolds:
In ADGM, there was a Board of Emiratis that's effectively comprise the legislature and they can decide on the rules. But they're happy for Common Law practitioners, with the judge of the courts, judges being from the Common Law, well, very distinguished legal luminaries from around the Common Law. Well, it's headed up by Lord Hope. He's a brilliant Common Law lawyer, and the others are excellent, they're brilliant as well. It's a big leap, because you had to be prepared to accept another operating system. So, I think it's very impressive that the UAE, and Abu Dhabi in particular have been prepared to make that leap, and I think it's paying off.
Barney Reynolds:
DIFC, which was an earlier financial free zone, formed earlier in the UAE, involved adoption of the co-defined version of the Common Law, which shares a sort of slightly betwixt in between system, but with some benefits from the Common Law and that's been successful. ADGM has gone the whole hog towards the real Case Law system. That's probably the most innovative in the world right now. We'll have to see what the future brings, but I think it's very exciting. And I think it's not before time that people now really appreciate the benefits of doing law and regulation sensitively, and what that brings to entrepreneurialism, to innovation, and as you say, ICE Futures Abu Dhabi, which I think is an extremely innovative venture trading the more than crude future. For the first time this has been done effectively in the Middle East.
Josh King:
The United Arab Emirates is so far from the United Kingdom both geographically and also politically, Barney Reynolds, what made you get involved in the project involving ADGM?
Barney Reynolds:
I was asked to meet someone very senior and brilliant Emirati in charge, His Excellency Ahmed Al Sayegh, and he asked what I'd recommend and I recommended this model. And he's a visionary man, and obviously a lot of others, bought into the idea that this would be the best way to do it. But it's a huge intellectual leap. It requires A lot of analysis and thinking in Abu Dhabi as to what they were comfortable with, and how it would work, and explanation of how it would interact with everything else in the country.
Barney Reynolds:
But I think that seeing the results. I mean, they've got now over, I think it over 16,000 people there, over 2,400 companies. I mean, it goes up all the time. This is after five and a half years. I mean, it's an extraordinary results of sort of mushrooming of business under this architecture, which effectively wasn't there before. People are able to choose any of the three systems they want. The real modern financial business for innovative services based business, they're choosing the Common Law.
Josh King:
So then, that leaves the future of the European Union and where it goes from here. Does the block need to redefine its policies and financial services and indeed in other areas of trading commerce?
Barney Reynolds:
I don't think so. I mean, these legal systems sort of go side by side with how one governance oneself and how the country or society operates. And so, those existing within a codified model, are obviously generally speaking, happy with that. So, it's just different. For financial services, I think the Common Law system is just superior. But I don't think you can easily, if at all, change a large state from one system to another. I don't see that happening. I think the EU is going to become more of what it is in a way, which is it's gonna roll out more codified law across industry sectors. I think the Euro will become more and more prominent.
Barney Reynolds:
So, I think the Eurozone issues, in terms of the risk that I described creating, will have to be sort out in the short term. And the only place that can really sort that out is the UK or the City of London in the wholesale market space by providing the liquidity and the skills to be able to keep the show on the road.
Barney Reynolds:
In 20 or 30 years time, I would guess there will potentially be the integration of fiscal and monetary arrangements, which would mean that that's not necessary. But I think it's gonna be a controlled economy on the codified Civil Law model. And that works for bits of industry.
Barney Reynolds:
You can see that in Northern Europe. For certain types of industry, that method of a controlled economy can produce good levels of wealth for a lot of people. There'll conversely be a Common Law worlds, UK, US, Commonwealth operating on a slightly different model, which I think the difference will become more noticeable, but it's possible very happily to inter operate between the two. It's not a problem trading between these two systems, but within each thought bubble as it were, the way of reasoning and approach to everything is fundamentally different.
Josh King:
There are these places where it all meets up though, Barney Reynolds. And I mentioned Northern Ireland in the introduction, you talked about it a little bit in the first part of the show. It's a place that I got to know when I traveled there with President Clinton in 1995 at the beginning of the peace process. In a relatively recent article in the Daily Express, you referred to the Northern Ireland Protocol as I'm going to quote here, "A sort of land grab by the EU, in which a number of people in Northern Ireland find unacceptable, and it was forced through by the EU over their heads." What do you think are the implications of the Northern Ireland Protocol? And what's the best way to manage it?
Barney Reynolds:
So, where we've got to in Northern Ireland, in a normalized international law terms, is the Good Friday Agreement. And that is an arrangement under which basically Northern Ireland is part of the UK unless everyone votes, a majority votes are some those sort of ways of evaluating what that majority is. The Northern Ireland Protocol was agreed as part of the two-step process that EU insisted on in growing a future trade relationships in the UK and the EU after Brexit. And the UK, as we've touched on earlier, the majority of those in charge, at least, elected, did not want to leave with a no trade deal I.e on WTO terms, the so-called Hard Brexit. In order to avoid that the EU said fine, okay, we'll talk about a trade deal but only if you sign up to this protocol first. What does the protocol do? It applies EU law for goods and agri products in Northern Ireland. It applies EU State Aid law in Northern Ireland and also in so far as it touches on competitiveness, has a competitiveness implications across the north south border. It also applies in Great Britain, the mainland.
Barney Reynolds:
And it gives the European Court of Justice the power to interpret that law, and the European Commission Executive authority in terms of applying the State Aid law. So, effectively, Northern Ireland first considerable economic purposes remains part of the EU. But without any votes, because nobody in Northern Ireland has any votes of what happens. Now, it's highly questionable, in international law terms, whether the arrangement is enforceable. The European Courts of Justice itself, in relation to the people of Gibraltar, who at one point weren't being given a vote over EU Law, decided that they had to have a vote, which they then did get given, because you can't have people subject to a law without a vote.
Barney Reynolds:
But there's no way of constructing that for the people of Northern Ireland. I mean, you could say that people in the republic, the MPs, I mean, members of European parliament from the republic could exercise a vote in their favor, but they're not elected by the people in Northern Ireland. That's no proper democratic infrastructure around that. So, I think it's a highly questionable arrangements, potentially in breach of the Vienna Convention and it's seeking to override national sovereignty. And in fact, when the UK implemented the withdrawal agreements in the protocol, which was addendum effectively to the withdrawal agreement, negotiated principally by the Theresa May administration. It did so with a section in the statute which said that the UK Parliament remains sovereign. So, it's a caveated implementation anyway.
Barney Reynolds:
So, I don't think it works legally, I don't think it's acceptable on a whole host of fronts, but starting from the democratic. And what it seeks to do with its conceptual architecture, is effectively impose a border across the RFC within the UK, which is another absurdity. So, the question is what does work then? And it's consistent with where we got to with the Good Friday Agreement. Because actually, this whole arrangement, as Lord Trimble, the Nobel Peace Prize winner said, is incompatible with the Good Friday Agreement. It's just an unconscionable in compatibility.
Barney Reynolds:
The answer is there are two things that would work for the border. The problem to solve for, that we all agreed that needs to be solved, is the invisible north south border and the island of Ireland. And there are two ways to achieve that. One is so-called alternative arrangements, and a group of people over here who put an immense amount of work into creating an analysis around that. It's actually drawing on the best border processes from around the world, the highest tech ones to make that border invisible.
Barney Reynolds:
The EU rejected that saying, oh, well, it involves a sort of stitching together 20 plus different techniques. And what they did was, came up with theoretical gaps, where if someone did X, Y, and Z, this wouldn't be picked up by a particular technique, and there was entirely theoretical process. And it reminds me of, I mean, I think it goes back to the Common Law, Civil Law difference. The UK people think in terms of bottom up pragmatic approach, the codified person, codified fire, thinks in terms of conceptual architecture.
Barney Reynolds:
And there's the old legal joke, I think French laws sometimes make it, and Canadians, that works all very well in practice but does it work in theory. And so, we had a sort of surreal discussion around that, it was rejected roundly. But there is another way if that remains unacceptable to the EU; to have an invisible north south border, which is called neutral enforcement, I've been parts of sort of expanding that. But in fact, it was something that was originally suggested at the high level by some people in the EU itself.
Barney Reynolds:
And that basically, is conceptually pure. It meets the sort of civilian lawyer test of does it work in theory? It does, it arguably works in theory. And what it does is to say that, it flips the processes on their head and reverses them effectively, so that the export country, the country where the exporter is, will conduct the checks and garner any tariffs on behalf of the importer, and vice versa, obviously. It'd be mutual, which is keep the whole thing honest. And that provides for an invisible border in theory as well as practice, because essentially, the UK could be in control of being able to do that, it could be made a criminal offense to willingly and knowingly to evade these border control processes. And the exporters could easily be set up at the UK's cost within the UK to meet these requirements. I hope that's now adopted.
Josh King:
So, as we wrap up Barney Reynolds, you've mentioned in the past that the City of London and the Bank of England are key players in mitigating the risk to the global economy as posed by the Eurozone. Sounds like a pretty crucial responsibility. Looking ahead, can you explain the UK's role in this context? What are the weaknesses within the Eurozone?
Barney Reynolds:
Well, the weakness stems from the facts that the Eurozone splits sovereignty between federal arrangements for monetary affairs, and the fiscal arrangements left domestic. The Eurozone seems to be suffering for monetary arrangements. But when you split the sovereignty, neither of them has full sovereignty. And yet the EU double counts sovereignty in its law and treats both of them as sovereign. And in crucially, it treats member states as fully sovereign in the debt that they issue, which is the underpinnings of any global market. And so, that debt is allowed to be held by any financial institution without capital charge, is not to be counted for 100% of its value for collateral purposes, and liquidity purposes, it can be treated as fully liquid. And yet that's clearly not true.
Barney Reynolds:
But what's the result of doing that is that immense risk is created, which is captured by the financial markets. And because the markets are inherently complex, and the institutions largely within the EU that acquire those debts, then don't sit still, they do deals with everyone all over the world. That risk dissipates putting the assets of savers and investors around the world at risk. What the UK does through its annual stress tests conducted by the Bank of England is model very sort of significant shocks in the Eurozone, and it imposes capital top-up requirements on banks over here to absorb that risk effectively.
Barney Reynolds:
So, people here, or the investors in the banking system here, are effectively paying for the mitigation of that risk. And the EBA, which undertakes the stress test for the Eurozone, has a double stand on the assumptions, and doesn't acknowledge it. And you wouldn't expect otherwise in a way, because having created the entire architecture at a rules level, you wouldn't expect it to be reversed out at a supervisory level. But the result of that is that, we have this risk which now needs to be mitigated because of Brexit in a different way by the global markets. The UK, and actually the US need to find a different way of addressing that risk.
Barney Reynolds:
There are some other distortions it contributes to in fact, trade dumping and unfair subsidization. It produces artificially cheap finance within the Eurozone for exports as well as for internal purposes. Going along with that target too, provides almost unlimited subsidization effectively to Eurozone companies by providing financing to the buyers, and then separately the Euro itself because of the splits and further reasons. It's effectively artificially low in value for the Northern Eurozone. So, essentially, it's a cake and eat it solution, where certain countries are guessing the benefit of an artificially low currency and subsidization through target to and cheap banking, which is affecting trade around the world as well. So, all of this needs to be looked at, and all of this needs to be addressed somehow to protect the rest of the world from it while the EU decides how and when to normalize.
Josh King:
Well, Barney Reynolds, as we have our cake and eat it and draw our conversation on All Things Brexit to a close, what's on the horizon for you, more books? What's taking up most of your time from here on end?
Barney Reynolds:
Just normal advisory work. I don't have any books currently plans. So, I'm very much enjoying just my normal work. And looking forward, I hope, to a Summer holiday.
Josh King:
Excellent. Well, I think it's been quite a five-year journey since that time in June 2016, and a great journey ahead surely as we get used to what it's like in a post-Brexit world. Thanks so much Barney Reynolds for bringing us on this journey and for joining us today inside the ICE House.
Barney Reynolds:
It's a pleasure. Thanks Josh King.
Josh King:
And that's our conversation for this week. Our guests was Barney Reynolds, Partner at Shearman & Sterling. If you like what you heard, please rate us on iTunes so other folks know where to find us. And if you've got a comment or question you'd like one of our experts to tackle on a future show, email us at [email protected] or tweet at us @ICEHousePodcast. Our show is produced by Veronica [Swamka 01:00:24] and Pete Asch with production assistance from Steven [Romanchik 01:00:28] and Ian Wolf. I'm Josh King King, your host, signing off in the Library of the New York Stock Exchange. Thanks for listening, we'll talk to you next week.
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