As politicians and the financial community adjust to the likelihood of a hard Brexit with no continued membership of the EU’s single market, the City of London’s main lobby group has abandoned hopes of retaining “passporting” rights for UK-based firms to sell financial services across the Union while being regulated in Britain.
Instead, TheCityUK called this week for a bespoke agreement based on the principle that the EU and Britain would recognise each other’s regulations as being broadly equivalent and agree on mutual recognition to allow companies to go on supplying some services from the UK without having to set up costly separately capitalised subsidiaries in each EU country.
But the call may be based on illusions about the nature of the EU’s “equivalence” regime for third countries, and about the willingness of the remaining 27 member states to give Britain an equal say in shaping financial regulation after it leaves the Union.
At stake is a multi-trillion euro business that employs more than 300,000 people in the City, making London the world’s leading financial capital alongside New York, and contributing more than 10 percent of Britain’s GDP and tax revenue. Leading international banks have warned that they will move jobs out of the UK if they lose unfettered access to the EU market.
“Equivalence” is a relatively recent policy under which, on the recommendation of the European Commission, the EU can agree to consider that a third country’s legislation on certain financial instruments is broadly in line with European standards, allowing it to sell limited services into the single market. Those rights are conferred unilaterally by Brussels, and can be withdrawn unilaterally at a mere 30 days’ notice if a partner state’s laws are considered to have diverged from the equivalence requirements. Furthermore, third countries are expected to update their financial rules continuously to comply with the latest EU legislation. That would mean Britain accepting future EU regulations without having a say in their formulation – hard to swallow for Brexiters.
TheCityUK is proposing a radically different version under which Britain and the EU would create a “long-term stable framework which can only be changed by formal agreement”. Some form of arbitration body would be set up with the power to decide on whether the EU could withdraw “equivalence” from countries doing financial service business with it. But there is no prospect of the EU27 conceding such a veto power, which David Cameron failed to win when the UK was a full member of the Union.
Bank of England governor Mark Carney also told a parliamentary committee this week it would be unacceptable for Britain to become a “rule taker”, arguing for the creation of a joint EU-UK body to agree on new regulations and preserve equivalence in financial rules.
“Equivalence” was created to encourage regulatory convergence and trade with countries which have their own rule-book and are far less intimately linked to the EU than Britain. In the British case, it would serve at most to limit and codify the future divergence of an ex-member which has so far implemented all EU financial regulations in domestic law.
“It works for Canada, which has a handful of financial transactions a day with Europe. It would be a strange animal for a country with the UK’s level of integration and thousands of daily transactions. You can’t just give equivalence to the UK as you would to other countries because of the financial stability risks involved,” a Brussels insider said.
Carney made the same argument in reverse in his parliamentary testimony, telling MPs: “Once we’re not there, we will get . . . one would expect, increasingly rules with which we don’t agree and which may cause risk to financial stability.”
EU officials suggested recently the Commission review the operation of the “equivalence” system, but with a view to tightening the rules rather than giving outsiders more say. TheCityUK’s attempt to put a post-Brexit Britain on an equal legal footing with the EU looks like wishful thinking.
Edited by Michael Prest
Why would the EU want to offer a “special” equivalence deal to the City of London? From the point of view of their tax base, the more jobs they can move to Dublin, Paris or Frankfurt the better. From the point of view of their businesses having access to London markets, they will still be able to do this after Brexit – nothing will stop London “wanting to sell”.