The UK will leave the EU. We will be an independent country, passing our own laws and governing ourselves. We will be a Global Britain, always the most passionate, most consistent, most convincing advocate for free trade, promoting peace and prosperity around the world.
We will seek a unique, reciprocal UK-EU arrangement of open trade in goods and services and co-operation on other matters, like counter-terrorism.
That was the Prime Minister’s message on 2 October. The only constructive choice is to help make it happen.
In that context, the Legatum Institute’s Special Trade Commission, bringing together over 200 years of experience across hundreds of trade agreements, has become the UK’s leading voice of pragmatic free trade in this transition.
Its Financial Services Briefing, released yesterday, illustrates in authoritative detail a spectrum of viable models for UK financial services trade with the EU.
The UK must be willing to rely on existing third country arrangements with the EU so we can pursue opportunities for better regulation and global growth. Nevertheless, there are strong mutual incentives to agree regulatory equivalence and continued reciprocal market access as a transitional arrangement to a full free trade agreement.
That agreement would have a comprehensive services schedule binding both parties to market access and national treatment subject only to each complying with globally-agreed standards.
Given we will be fully compliant with EU law on exit, the practical barriers are low; the obstacles are political and the pressures on our partners will increase.
Take asset management. There are 94 EU firms with passports into the UK, managing nine per cent of the £5.7 trillion assets under management here.
Meanwhile, 32 UK companies passport to the EU with six per cent of assets held by European investors. There is strong reciprocal interest here. At our exit date, we will be compliant with the UCITS V directive.
While that regulation offers many opportunities for improvement, EU members can allow asset managers to delegate their functions to firms in third countries.
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Ireland permits delegation to managers in countries outside the EU, including Japan, Hong Kong, Australia and the USA.
The bottom line is that it would not be feasible for the EU or its members to cut off delegation to the UK, especially against likely objections from Ireland and Luxembourg: operating as a third-country asset manager would be viable.
However, if the UK is deemed equivalent in our withdrawal agreement – the logical consequence of our following EU law until we leave – then there is no reason we cannot continue asset management on the present basis as a transitional measure to a full bilateral free trade agreement.
We have a transformational opportunity to pivot towards providing better-regulated UK products to savers and investors in regions with deep and growing capital pools: that must be our strategic goal.
In investment services and market infrastructure, the new “MiFID II” rules will take affect in January 2018, introducing a new regime for authorisation of third-country firms. That provides a pathway to market access in addition to national and WTO rules.
There will be no legal obstacle to the Commission recognising the UK as equivalent under MiFID II and the alternative would be significant market disruption across the EEA.
Through member-state authorisation, third-country agreements and equivalence recognition, viable options exist for deposit takers and insurers too. In every sector, there are strong reciprocal incentives to conclude bilateral arrangements of equivalence as a transition to a modern free-trade agreement.
There is disadvantage to EU firms, for example, in failing to carry forward the preferential risk weightings of assets held in the UK.
The Special Trade Commission has shown that the foundations and incentives are in place for viable transitional arrangements for our financial services firms doing business in the EU.
Once the pragmatism of commercial incentive supplants political grandstanding, we will find we can leave the EU swiftly and successfully into a world of more competitive regulation in which the City flourishes.