City flexes its muscle as Brexit talks resume: Transitional services deal needed by Christmas to avoid harm say business leaders

The Square Mile - London's Financial District
The UK voted to leave the European Union on 23 June 2016 (Source: Getty)

Brexit secretary David Davis and his EU counterpart Michel Barnier launched the latest round of exit talks last night, as the City expressed fresh concern over the lack of progress on a transitional deal for financial services.

Senior business figures are warning the government to secure a bespoke transitional Brexit deal for financial services by Christmas – or risk doing unnecessary damage to the Square Mile. But yesterday’s launch of the third round of talks highlighted a continuing gap between the two sides over the sequence of negotiations.

Davis yesterday called for talks to cover “all the issues”, speaking in Brussels ahead of two days of technical negotiations. He has previously argued that so-called separation issues are “inextricably linked” to talks on the future relationship between the UK and the EU.

However, Barnier has insisted the UK must present its position on separation issues – including the controversial divorce bill – before talks on the future trading relationship can be carried out.

Read more: Davis to try to seize control of Brexit negotiation with flurry of papers

Barnier said he was “concerned” by the lack of progress made so far, and called for further UK position papers clarifying its stance.

“We must start negotiating seriously,” Barnier said. “The sooner we remove the ambiguity, the sooner we will be in a position to discuss the future relationship and a transitional period.”

Talks this week are set to cover a number of highly technical issues around the UK leaving the EU, such as the functioning of nuclear regulator Euratom as well as the fraught question of the post-Brexit Irish border.

During working groups this week British negotiators will also give a presentation to the EU on the post-Brexit financial settlement, one of the areas on which progress must be made before the EU agrees to talk about a future trading relationship.

However, the prospects for a transitional deal this year on the crucial services sector, including the huge financial services industry, depend on both sides being satisfied with the progress of talks.

City sources say that firms want a paper setting out the government’s intention for a transitional arrangement in financial services as soon as possible, so that a binding agreement with the EU can be completed this year. If a deal is not in place by the start of 2018, finance companies believe they will have to begin preparing for a hard Brexit in earnest. This would mean accelerating plans to shift operations from the UK to EU countries.

“In the absence of a transition, banks have no choice but to prepare for a hard Brexit, otherwise there is no guarantee they can continue to service their clients,” Lindsey Naylor, a partner at consultancy firm Oliver Wyman, told City A.M.

“I think hard decisions will have to be actioned in the first quarter of next year, with planning taking place between September and December. They need to be ready for the end of next year.”

Read more: Deadline day: Firms must present hard Brexit plans to Bank of England today

Naylor, who co-authored an Oliver Wyman report warning that up to 35,000 financial services jobs could be lost in the event of a hard Brexit, said firms would need to start deciding on people transfers, office space, technology purchases and other investments in the early months of next year.

Pressure on the government to give clarity to firms has increased after Labour announced it favours retaining access to the Single Market during a transitional period, after previously saying it was opposed to remaining a member of the trading bloc when the UK leaves the EU.

On Sunday shadow Brexit secretary Keir Starmer wrote that retaining Single Market membership would ensure that trade continues between the UK and the EU, avoiding a “cliff edge” for businesses.

Businesses on both sides of the Channel are anxious that the government prioritises economic issues during the negotiations.

The British Chambers of Commerce (BCC) and the Association of German Chambers of Commerce (DIHK) yesterday issued a joint call for negotiators to tackle urgently fundamental and "business-critical" areas such as the rights of workers, customs arrangements, and tax procedures.

BCC director general Adam Marshall said: "There is real business appetite from both sides for a focus on practical, day-to-day business concerns, and a desire for clarity on future trading arrangements.

“The UK and the EU must begin work on transitional arrangements, particularly on customs, so that firms on both sides of the Channel have the confidence to make investment decisions."

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