A post-Brexit free-trade deal with the EU which includes financial services could be completed in three years, according to the Bank of England’s chief banking regulator, countering the view of the EU’s chief Brexit negotiator, Michel Barnier.
Sam Woods, the Bank’s deputy governor in charge of the Prudential Regulation Authority, said it is “plausible” that the UK and the EU could agree a “detailed free-trade agreement” which includes financial services within three years.
“We’re fortunate in starting this discussion in a unique position in terms of having completely aligned rules and strongly aligned supervision,” he told told MPs on the Treasury Select Committee.
Woods also explicitly rejected the stark choice set out by Barnier in which UK financial services are either in the Single Market, using passporting, or outside the EU using equivalence to access EU firms.
“It is both desirable and it is entirely technically feasible to devise something that is not one of the two extremes which Mr Barnier described,” he said, although he added it was nevertheless “challenging”.
Michel Barnier last month said there is not a single trade agreement that is open to financial services, and said it was unavoidable that British firms will lose their passporting rights as the UK leaves the Single Market, relying instead on third-country equivalence rules.
Woods today warned of broader “tensions” with EU counterparts in banking regulation regarding requirements for wholesale and investment banking to establish subsidiaries.
European investment banks with operations in the UK and vice versa can currently operate with a branch – a situation the Bank of England wishes to continue – but EU regulators have expressed their desire for subsidiaries, Woods said.
Banks working across borders dislike the idea of establishing full subsidiaries, which must hold more capital separately from the parent company, making banks less profitable. However, regulators believe they are safer during a crisis, and make disastrous capital flight less likely.
The Bank of England wants retail banks to continue to operate as subsidiaries, but wholesale banking is inherently more cross-border, Woods said. Bank of England governor Mark Carney said before Christmas that EU banks will be able to operate as branches in the UK with or without a Brexit deal.
He added that EU regulators have a “mindset that is more local, more ringfenced, more like what we do for retail, for everything” because they do not share the UK’s history as a global financial centre.
“Our perspective is basically retail activity both insurance and banking should be local, should be ring-fenced should be in subsidiaries,” Woods said. “Wholesale finance is naturally cross border and we should find ways to make that work.”
However, Woods repeated his earlier warning that failure to reach a political agreement on a Brexit transition deal by the end of the first quarter (Q1) will be damaging. Firms desire a transition deal to be able to continue to trade after March 2019, until a longer-term trade deal is agreed – although firms are already moving jobs out of London.
“If we get to the end of Q1 and a transition period has not been agreed then I think we can expect those activities to go up aanother gear – and they’re already in a reasonably high gear,” Woods said.