There are some big Brexit hurdles for the City to leap, writes Barney Reynolds
As parliament considers how to pluck a withdrawal agreement out of the ashes of the previous draft, it is important that the respective interests of the UK and the EU are brought to the fore, particularly for the UK’s highly-successful financial services sector.
The UK wants a deal on services, covering 80 per cent of the economy. The EU wants a deal on goods, protecting its massive trade surplus. Some in the EU also wrongly seek to acquire dynamic control of the UK’s competitiveness – allegedly protecting a “level playing field”, but in reality going far beyond any normal international trading terms.
Two key issues are fundamental for the agreement in financial services: sovereignty and trade. May’s deal falls dramatically short on both, and parliament has rightly rejected it.
On sovereignty, the draft provides for a long-term shackling of the UK to various EU laws through the Northern Ireland backstop. The rules on state aid would allow the EU effectively to exercise unilateral control over UK fiscal policy.
Such an unprecedented, lopsided arrangement would subjugate the UK’s competitiveness, tilting the playing field towards the EU. The EU also seeks to bind the whole UK economy to EU social standards developed for the goods economy, and to environmental standards ill-suited to the UK that drive higher energy costs. These provisions are intended to underpin any future relationship.
On trade, the agreement fails to protect services business. There is a deal in goods, favouring the EU and imposing a customs union through the Northern Ireland backstop, contrary to the government’s stated long-term intention. This would prevent the UK from achieving trade deals in goods around the world and would also restrict it from agreeing favourable services deals.
The transitional arrangement is dangerous for the financial services industry and UK taxpayers.
It prevents the highly-regarded UK regulators from exercising control over the content and meaning of their rulebook, introducing unacceptable risks. It also allows, at least in theory, EU lawmakers to introduce rules detrimental to the global markets in the UK.
The deal then leaves the parties to negotiate mutual access arrangements during the transition. This permits member states to pick away at UK interests whilst dangling the negotiations, and EU state aid law prevents the UK from taking countermeasures to provide businesses with an attractive future regardless.
There is in fact a simple solution which would tackle all of these problems.
Given the relevant UK and EU laws are currently the same, moves can be made to implement a legal mechanism on Brexit, emanating from EU law, that achieves the outcome both parties have agreed they want – in November’s political declaration.
For services, the agreed trade outcome involves the mutual recognition of service qualifications, legal professional privilege and other minor matters. For financial services it comprises enhanced equivalence.
The existing EU law concept of equivalence, already in use with the US and other countries, would permit each party’s businesses to have access to the other’s markets, avoiding the expense of any duplicative regulation and supervision.
UK-based financial businesses providing cross-border services into the EU would be regulated only by the UK, and vice versa, on the basis the parties’ rules achieve the same high-level outcomes.
By thus replicating the benefits of existing EU passporting arrangements, this would save considerable cost, particularly for EU27 customers, and would enable firms to stop their contingency planning for a no-deal Brexit.
The relatively minor shortcomings in the EU’s current equivalence arrangements are fixable by filling in the gaps and ensuring the processes are predictable. Previously, I have proposed a detailed draft treaty which provides a legal framework and indicates how this can be done neutrally.
Equivalence arrangements come with no price tag in terms of state aid, social or environmental rules. These concepts are absent from existing EU equivalence arrangements with the numerous countries that are in place around the world. And equivalence is something the EU needs to declare for most UK businesses anyway, to protect its own economics.
In fact, the EU has already recognised the UK’s central counterparties and securities depositories as being equivalent from the moment of Brexit. Other equivalence declarations are likely to be forthcoming. The lift in agreeing to a more formal enhanced equivalence arrangement is pretty minor.
Importantly, enhanced equivalence would enable the UK to continue to treat Eurozone member state government bonds as sovereign – something the EU desperately needs so banks can hold them economically, in defiance of international Basel rules.
Without this, Eurozone states would find it difficult to raise much-needed capital, and their domestic banks would have trouble dealing in the international markets. The UK can, by using its other levers under equivalence-based arrangements, address surges in eurozone risk.
What matters for a revised withdrawal deal is that the UK’s aims for sovereignty and trade are respected.
For financial services, without a move to equivalence, markets and taxpayers could suffer and much could be lost. Agreement in principle already exists. There is no reason not to cement things straight away, removing the uncertainty that is damaging to all.