Best City can hope for is less access and less control

Brexiters promised prosperity and control. Our largest industry, financial services, will get less of both.

Since the referendum, some of the best brains in the City of London have been trying to devise a strategy which reconciles the needs of an industry that’s responsible for about a tenth of our economy with the government’s Brexit red lines: in particular, its commitment to leave the EU’s single market and escape the European Court of Justice’s jurisdiction.These mean our financial services industry will lose its highly profitable “passport”, which let it operate anywhere it wishes in the EU.

The best alternative anybody has so far come up with is a deal that would allow UK and EU financial firms to maintain most of their access to each other’s markets so long as our rules don’t diverge too much from the EU’s. Such a scheme was proposed last week by the International Regulatory Strategy Group (IRSG), a quasi-official off-shoot of the City of London’s governing Corporation which includes government observers.

There are three problems with its proposal.

First, as the IRSG itself admits, access for our firms to EU markets will be “inferior” and “less certain” by comparison with the status quo.

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Second, the IRSG proposes a system of regulatory alignment and supervisory cooperation between the UK and EU. This would be buttressed by a forum where the UK and EU would discuss how to implement new regulatory standards and a dispute resolution mechanism to determine whether market access should be reduced in the event that regulations started to diverge.

In theory, this arrangement would be symmetrical – allowing the UK to deny EU firms access if rules on the other side of the Channel diverged. But, in practice, as the smaller party, we would lose influence over the rules we would have to follow. We would become a rule taker not, as now, a rule maker.

Third, it’s far from clear that the EU would agree to such an arrangement. It could be worried that the UK was seeking a special deal for its most important sector – what it terms “cherry picking” – without agreeing to shoulder the broader obligations of the single market.

In any event, the EU is unlikely to discuss arrangements for the City until the broad shape of our overall final deal with the bloc has been sketched out – and given the chaos in Theresa May’s Cabinet that’s unlikely until well into next year.

When the time comes, the City is likely to get even less access and control than the IRSG is hoping for. And by then, even more financial firms will be relocating some of their activities across the English Channel or Irish Sea.

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Edited by Hugo Dixon