Features
Beth Ashmead-Latham 1 May 2018 02:44pm

Brexit: what's the deal for financial services?

Michel Barnier, the EU’s Brexit negotiator, said last week in Hanover that the UK’s vision for the future, should “confirm the UK's red lines or adapt them”

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Caption: A closer look at how Brexit is impacting on the financial services sector

His request for clarity comes at a time when no option is without challenges to both sides of the negotiating table, particularly when considering the UK’s financial services sector.

Both the city minister and international trade secretary expressed cautious optimism for UK financial services post-Brexit, However their positivity was met with scepticism from EU officials and UK commentators.

Speaking at the City Week Conference last week, city minister John Glen told an audience of business leaders that, “A loose relationship with the UK will not give the EU the depth of cooperation necessary for a market as close as the UK, and vice versa.” He added that the EU had “expressed a willingness to agree a wide ranging free trade agreement on services”.

There has been broad dismissal of this optimism from EU officials and UK commentators, including former Treasury and European Commission official, Mujtaba Rahman, who said, “Glen’s notion that the EU is softening is simply wrong”, according to The Guardian.

Three main options for establishing continued market access between the EU and UK have been discussed during Brexit negotiations thus far, with no single method preferred by both sides.

Equivalence agreements

During City Week, the EU commissioner in charge of financial stability, Valdis Dombrovskis, called for equivalence agreements. He acknowledged that these would not cover all parts of the financial sector but argued that “equivalence has proven to be the pragmatic solution that works in many different circumstances”.

TheCityUK, which represents financial and related services in the UK, shares the view that equivalence agreements are insufficient. TheCityUK chief executive officer Miles Celic said, “Equivalence in its current form was never designed to carry the weight of a UK/EU trade relationship.”

Passporting

The EU ruled out passporting of goods, services and capital last month, in response to the UK’s decision to end the free movement of people. Barnier said in January that when a country leaves the EU’s precise framework and integrated supervision, “Its financial service providers can no longer enjoy the benefits of a passport to the Single Market nor those of a system of generalised equivalence of standards”.

In a speech on 2 March, prime minister Theresa May confirmed that passporting was no longer an option, adding that it would require the UK “to be subject to a single rule book, over which we would have no say”.

"The UK has responsibility for the financial stability of the world’s most significant financial centre, and our taxpayers bear the risk, so it would be unrealistic for us to implement new EU legislation automatically and in its entirety," she said.

Mutual recognition

While the EU has opposed mutual recognition, the City continues to favour it. Andrew Bailey, chief executive of the Financial Conduct Authority, told the City Week conference that mutual recognition, “Would be the better way to establish the steady state between the UK and EU in the future”.

The CBI highlighted each sector’s needs in its Smooth Operations report in April. listing mutual access for financial services “based on mutual recognition of EU and UK rules” among them. It added that this would be particularly crucial for banking, insurance, asset management, market infrastructure and payments regulation.

Celic said that mutual regulatory recognition wouldn’t conflict with the legal integrity of the EU nor give the UK a vote on EU regulations but that it would “create a new system that allows for alignment and managed divergence as and when required”.

Meanwhile, Simon Morris, a financial services partner with law firm CMS, said that Bailey’s description of mutual recognition “describes perfectly the very system we are set to leave, and which the EU has made pretty clear it won’t be offering to replicate outside full EU membership”.

Looking Forward

In the absence of simple answers, both sides are continuing to advocate their preferred approaches.

“It is entirely likely that the final Brexit deal will contain a framework for both equivalence and mutual recognition going forward, depending on the area of financial services in question, ” said Allie Renison, head of Europe and trade policy at the Institute of Directors.

Meanwhile, international trade secretary Liam Fox told the City Week conference that the UK’s professional infrastructure in financial services could not be replicated anywhere else in Europe. Catherine McGuinness, chairman of the City of London’s Policy and Resources Committee, listed the UK’s time zone, language, legal system, technological innovations, financial infrastructure, regulatory frameworks and its ability to attract international talent as inherent strengths of London’s position as a leading financial centre.

John Mongelard, ICAEW technical manager, risk & regulation, Financial Services Faculty said, “The EU line sounds hard. We should expect this, not be offended, not take it literally necessarily and recognise this is how a negotiation often works. If you want someone to move an inch, you first ask them to move a mile.

“Many banks already have offices in EU land. In July 2016 many banks would have been pulling for passporting but now many have executed their contingency arrangements or are ready to do so. They have built out their branches or subsidiaries as required. In one survey of UK financial firms were asked if Brexit would affect their business model and 84% said ‘no’.”

While none of this guarantees that jobs won’t leave the city, it does suggest that they won’t necessarily move to another regional hub en masse. Andreas Dombret, director of Deutsche Bundesbank, told the BBC’s Today programme on 11 April that London would remain the “eminent financial centre of this region” regardless of whether bankers relocate.

However, he also pointed out that a Free Trade Agreement is not 100% certain, meaning the probability of a hard Brexit “is not high, but it is also not zero”, and urged London-based banks to start preparing to apply for licences if they wish to do business in the EU27.

Renison echoed the need for prudence saying that the UK should aim for provisions that don’t require companies to move, but noting, “It is clear that many of the larger firms are not waiting around for this type of access to be secured, and have initiated contingency planning regardless”.

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