The government's preferred post-Brexit trading model for the City remains uncertain amid growing concerns that Brussels is not prepared to compromise.
Mutual recognition, the post-Brexit system heavily promoted by the financial services sector as well as Whitehall, has failed to win the support of EU chief negotiator Michel Barnier.
One Square Mile source familiar with the negotiations told City A.M. the UK was “getting high off its own supply – they’ve come up with a great idea but not stopped to ask whether EU will actually go for it.”
Another said: “There are a lot of people in Westminster heading away from the initial thinking and towards the direction of managed divergence.”
Sam Lowe, head of trade and Brexit for think tank the Centre for European Reform, said member states were unhappy about being “lectured to” by government and City representatives.
“There’s been a bit of arrogance,” he told City A.M. “They know it’s bad but they’re not willing to risk the legal order of the EU and the integrity of single market, which they see as more valuable.”
It comes as a new proposal, put forward by think tank Open Europe, makes the case for a model that lies “between the so-called Canada and Norway arrangements framing the UK political debate.”
On goods, it suggests the UK accept the EU’s aquis of rules over goods
regulation, arguing “this does not necessarily mean full harmonisation with detailed EU rules in all goods sectors, only those that are already highly regulated”.
On services, the model proposes an enhanced equivalence regime which would allow for managed divergence – an approach reportedly favoured by the Bank of England.
Although relying on an equivalence regime has been rejected by the UK because it grants the EU control over withdrawing access at short notice, the latest thinking is that it could be workable if the notice period were extended to two years.
The model has the backing of pro-Leave peer Lord Lamont.
Open Europe director Henry Newman told City A.M.: “Equivalence isn’t enough – plenty of people on the EU side have acknowledged that – but for the government to hold out on mutual recognition seems fanciful.
“The City is hoping for a deep and special relationship but at this point we’ve got to accept that the EU is saying we won’t get anything other than equivalence. There is a danger in pressing for a completely hopeless deal.”
However, both City and Cabinet sources said they were sticking to their guns for now and would continue to push for mutual recognition.
Mark Hoban, chair of the International Regulatory Strategy Group (IRSG), which has been pushing for mutual recognition, said: “We’ve yet to start negotiations on the future relationship. Mutual recognition is still the government’s preferred option, it is still the industry’s preferred option and it is the preferred option for regulators.
"The UK position is robust. It is clear that mutual recognition is the only sensible and well-worked-through proposal that delivers continually high levels of access and continuing benefits to customers.”
He acknowledged that the Commission had been “steadfast” in rejecting the framework, but said he was “taking comfort from the fact certain member states continue to back it.”
A Cabinet source agreed negotiations were too early to “throw our position away”, telling City A.M. there were significant stumbling blocks with Open Europe’s proposal including the “constant threat of having access withdrawn looming over us”.