The publication last month of the Government’s White Paper on the future relationship between the UK and the EU grabbed headlines for the immediate political fallout. But the document, a product of the heated discussions held by ministers at Chequers on 6 July, was also seen as an abandonment of the UK’s original plan for financial services.
In place of “mutual recognition”, the UK has a new position, which is being termed “enhanced equivalence”. It offers greater regulatory autonomy to the UK in exchange for less access to the single market. It signals an end to passporting, which gave UK financial services automatic access to EU markets. These are unprecedented concessions.
At first, the City was far from welcoming. Catherine McGuinness of the City of London Corporation said the White Paper was “a real blow for the UK’s financial and related professional services sector”.
In private, however, institutional preparations have been measured and rational. A leaked internal report by that same City of London Corporation has recently revealed that financial services job losses could be as low as 5,000 after 29 March 2019. Many others have welcomed the UK’s balanced and pragmatic approach.
It is true that some back-office and trading operations will be transferred from UK banks to their European branches, most recently with Deutsche Bank announcing that it is moving almost half its euro clearing activities from London to Frankfurt. However, there has been nothing resembling the flood of capital, services and talent that has been often touted by doom-mongers. So far, only an estimated 1,600 jobs have been planned to move to European cities.
Clearly, legitimate concerns remain and there is much to be thrashed out in an increasingly narrow timeframe. But London is, and will continue to be, the cash nexus of the world. Whether in investment banking, asset management, insurance or newer industries like Fintech, London is truly leading the way.
UK-based investors and finance professionals have reason to be optimistic about the UK’s bright future after Brexit.
Citing its business-friendly legal and regulatory environment, global senior professionals have repeatedly voted London to be the world’s pre-eminent financial hub, ahead of other major centres such as New York and Hong Kong. One survey ranked London not only the top financial centre, but the only European city in the top 15 of the world’s rankings.
Figures from the Office for National Statistics have confirmed that UK financial services exports to the EU grew to a record high in 2017 and accounted for a fifth of UK services exports. UK-based banks currently underwrite around half of the debt and equity issued by EU companies. These facts put the UK’s financial services sector at a maximum competitive advantage on the global stage.
Going forward, it is essential that the EU cooperates with the UK to achieve a mutually beneficial outcome. However, Michel Barnier, the EU’s chief Brexit negotiator, recently said the UK’s current approach would deny the EU its “decision-making autonomy” over market access, a unilateral right which the EU Commission jealously guards. Whitehall officials later clarified that this was never part of their plan.
Without enhanced equivalence, both UK and EU-based firms would be left without a concrete reassurance that the EU Commission would not withdraw equivalence decisions for financial services at short notice. As it stands, a declaration of equivalence can be revoked with only 30 days’ notice under existing EU legislation.
The impact of significantly reduced access to financial services for European businesses could be costly, especially as UK and European markets are so deeply interconnected.
As the UK is the largest market for investment services in Europe, Paris, Frankfurt and Luxembourg have the most to lose from a bad or no deal. Such a stance also makes no practical sense. The banking and trading standards determining the UK’s regulatory regime are among the most respected internationally.
Asset managers and investors are rightfully concerned about specific issues, such as their ability to market and distribute funds in the EU, ensure continuity of existing contracts, and transfer contracts to new entities with the necessary regulatory permissions.
These matters should be perfectly resolvable; for example, the grandfathering of equivalence would ensure that market access remains uninterrupted even when the underlying regulatory framework is changed. On all these issues, the ball now lies in the EU’s court.
The UK should continue to seek cooperation on equivalence where possible, but it is appropriate to remind the EU what is at stake. UK negotiators were right to warn the EU Commission that around 7,000 European-based investment funds that are dependent on UK financial services could face additional obstacles put in place by UK regulators, not to mention similar uncertainties about their future ability to operate within the UK. In light of this, it is clearly in both sides’ interests to act in good faith and achieve a positive outcome that benefits all.
For now, Barnier has not entirely ruled out constructive engagement with the UK’s proposals. Barnier said that both he and Brexit Secretary Dominic Raab have agreed to have “close regulatory cooperation” as well as “respect the autonomy of both parties”.
Theresa May met with President Macron last week in search of similar concessions from the French, who, as Philip Hammond has warned, are hoping to poach as many financial services jobs as possible for Paris. They should be so lucky.
The next couple of months leading to the October EU Council Summit will be critical for both sides to establish a fair playing field for financial services on either side of the Channel.
The French and the German role in those negotiations will be especially important. Looking at the balance sheet, it is the EU, not the UK, which should be cautious about the next steps it takes.