Eyebrows were raised in the City this afternoon following reports that European authorities are launching an offensive in a bid to weaken the City of London following the UK’s departure from the European Union.
Officials in Brussels, Berlin and Paris are looking to amend the bloc’s Mifid II financial regulations by walking away from concessions made to the UK when the rules were drawn up, according to Bloomberg.
Regulations covering research spending, record keeping, and trading in stocks, derivatives and commodities are likely to be revised in a way that could make Brexit harder to negotiate for large international banks, it reported.
These rule changes would be aimed at bolstering Deutsche Boerse’s position against the London Stock Exchange in the trading of futures and other listed derivatives.
“The fact that the biggest financial market in Europe is now outside the EU will change the equation for financial-service regulation in general,” said Markus Ferber, a German member of the European Parliament who helped create Mifid II.
The EU is set to seek initial feedback from banks and other financial firms within days, with a formal proposal expected in the third quarter of this year, Bloomberg reported, citing sources with knowledge of the matter.
The level of access London’s financial firms will have to the EU when the Brexit transition period ends in December is yet to be determined, and will depend on the process of equivalence — under which the UK would have to prove to Brussels that its rules are at least as stringent as the bloc’s.
Under the equivalence system, the EU would be able to unilaterally decide whether the UK rules were tough enough to create a level playing field for firms.
“There is a risk that the Mifid review could be misused for political ends, which could ultimately, and regrettably, serve to frustrate access to EU markets by City firms,” said Nathaniel Lalone, a partner at law firm Katten, told Bloomberg.
Lalone, who works on cross-border regulation in derivatives trading, continued: “Combining the MiFID review with equivalence allows them the possibility to move the goalposts for equivalence, which could very well give the EU more leverage.”
However Barney Reynolds, a lawyer specialising in financial regulation at Shearman and Sterling, told City A.M. it was “inevitable” that the EU would “want to change some of the details in its regulatory regime”.
“Likewise the UK will wish to change its own regime, potentially quite significantly,” he continued. “In both cases we’re talking predominantly about detail. This shouldn’t affect the achievability of enhanced equivalence based on meeting high level internationally-defined outcomes”.
“There are all sorts of reasons to remain confident that such a deal will end up being agreed,” Reynolds added.
The pound dipped against the dollar immediately after news of the potential rule change by European authorities broke, falling below $1.30. Although sterling recovered some ground shortly after, it remained below the $1.30 barrier for most of the afternoon.
Markets.com analyst Neil Wilson said that while the reports could be a factor in the pound’s fall, stronger-than-expected US payroll data had also helped boost the dollar at the same time.
Wilson added that “this year will be full of headlines on trade talks that move the markets” as details of the UK’s future regulatory relationship with the EU are thrashed out.
“The EU is going to use anything as leverage to do London down,” he continued. “Both sides know how crucial financial services are to the UK economy… They know they won’t replace London with Frankfurt.”