The process of leaving the EU is likely to be a difficult one for the financial services industry.
London is a global hub, bolstered by its pan-European reach. But unless the UK government can negotiate a better position, the disappearance of financial services passports will mean firms in many sectors will not be able to conduct business within the EU as freely as they do today.
Many businesses are already planning for this contingency, which is why, in some limited areas, jobs are already moving out of the City. In part, this is because there is some resignation among business leaders that even if a deal can be done, the process of leaving the EU will be so complex, and the position of the UK’s financial services industry will be so central, that such a deal will only become clear very late in the negotiating process. This timeline might be too uncertain, and too late, for firms to rely upon.
Against this backdrop, what should the UK government’s early priorities be?
First, the UK government needs to recognise that many other European financial centres see Brexit as a great opportunity. The UK should acknowledge that the City has no special right to dominate European financial services business, and recognise that Europe has a legitimate interest in ensuring that the major financial services centre for Europe (and the euro) is not “offshore”, as London will shortly become. The UK has chosen to leave the EU, and should be open about the fact that doing so will have consequences.
Second, when the UK has left the EU, it will still be in a unique position. The UK has fully embraced the EU financial services Single Market and is already compliant with the rules. The UK government should therefore seek an early “in principle” commitment to continued access on the basis of maintaining equivalent rules.
The UK would also need a seat at the rule-making table, although thinking this seat would allow the UK to be a full rule-maker may be overly optimistic. It should be possible to make an arrangement whereby the UK courts would take into account, but not be bound by, European Court of Justice rulings on the meaning of the relevant EU legislation.
This overall approach is likely to come with a price tag, and the UK government is likely to ask the industry to pay for it. But only such an early “in principle” commitment is likely to give sufficient comfort to parties that they will continue to be able to carry out pan-European business from London.
Third, some European financial services Single Market measures already include a commitment to equivalence. Many do not, but some of the most important measures do (such as MiFID II, which the investment banking community relies on).
The UK government should emphasise, at the earliest possible stage, the importance of getting an “in principle” commitment to using equivalence measures where they already exist. Without such an “in principle” commitment, even the optimists about the Brexit process are likely to concede that achieving MiFID third-country equivalence status at a late stage in the negotiating process is unlikely to prevent businesses from making early decisions to transfer jobs needlessly to the continent.
The financial services industry is likely to take final decisions in 2017, not 2018, about whether to relocate, and if so, where and how much of their businesses to move. Understanding this timetable, and the importance of making early progress (even if the details are to follow) should be the priority on both sides.
Achieving a sensible outcome is not going to be easy. But unless there are signs of early progress, any good work undertaken at a later stage may, in part, be wasted if business leaders have already taken decisions to move their business (into the EU, or elsewhere).
The government needs to reassure the industry not only that it recognises the importance of access to EU markets for the financial services industry, but that the timing matters as well. While no deal is done until it is done, getting “in principle” acceptance on the key issues should be the UK government’s early priority.