Many in the City fear that Brexit means they must radically revamp their European business models.
They are planning their contingencies on that basis.
Their fear is the loss of the EU passport, which enables businesses in the UK to operate across the EU but be supervised solely in the UK, under pan-EU regulation.
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Yet Brexit is less disruptive than might first appear. Many of the gloomy predictions ignore the fact that we can place some reliance on EU law.
There is an element of confirmation bias underlying the thinking. Bleak discussions confirm pre-existing beliefs as to the need for expensive no-deal contingencies.
There are in fact two attractive ways forward for financial services on Brexit.
The first – the preferred option – involves obtaining mutual access through recognising each other’s standards.
This is what the government is seeking. It could be achieved by the time of Brexit, through making minor enhancements to the existing EU concept of equivalence. UK businesses could then carry on operating across the EU, solely under the jurisdiction of the UK’s regulators.
This would be an improvement on the passporting regime, which has increasingly meant applying rules that diverge from the City’s needs as a global financial centre. Regulators’ efforts have been misdirected away from the key points onto prescriptive minutiae. Worse still, the UK has topped up EU regulation with gold plating.
Enhancing equivalence would enable the UK to regulate in a manner appropriate to it owns financial markets, achieving outcomes equivalent to those sought by the EU.
These would be based on international standards where they exist and mutually agreed high level standards where they do not.
Why would the EU agree to this? Because it would give its customers the cheapest possible access to the global markets on the EU’s doorstep, liberating citizens from otherwise unnecessary costs that would dampen EU growth.
There could also be collaboration on new regulatory initiatives going forward. The UK and the EU would be separately sovereign and could veto the output of such efforts when they diverged from each other’s interests. But this would in practice be rare, and the EU would have a seat at the regulatory table.
The Prime Minister has made huge efforts to seek a deal. She has discussed the potential payment of very large sums of money to the EU.
Now the UK should start to clarify what it requires in return for these amounts (reminding the EU that in law they are not owed) and the significant deductions it will make if a satisfactory deal is not agreed.
Financial services – and indeed the services sector more generally – should be made a very expensive area for the EU not to deliver upon. A free trade in goods deal is self-evidently in the EU’s interests, given the UK’s huge trade deficit with the EU, so shouldn’t warrant the allocation of any payment by the UK.
The other way forward for the City is to plan for an attractive no-deal fallback.
This is very much a plan B, but it would be a mistake not to prepare for it. There are in fact many ways in which businesses can continue to service their EU clients from outside the EU after Brexit. They can do so without moving much, or any, infrastructure to the new EU 27. Studies have shown that businesses grow faster and are more successful when operating within a global financial centre, so it may make sense to remain in London even in the event of a no-deal outcome.
The government can step up a gear by assisting UK business to optimise the attractions of the plan B. It can also assist in ensuring the EU applies its own laws properly. Fortunately, the EU respects the rule of law and ultimately applies it in a manner which can be upheld in its own and in international courts.
Businesses should feel comfortable in treating the post-Brexit EU as a jurisdiction like any other.
The UK is starting to act. The governor of the Bank of England has floated the idea of rolling back aspects of EU financial regulation after Brexit, including the much-criticised bonus cap.
Britain can now prepare to refocus its regulation on what matters and away from unnecessary box-ticking.
If a deal is withheld by the EU, this will be at considerable cost to its own consumers – punishing them to make a political point. But businesses in the UK can, and will, continue to flourish.