EU negotiators have been accused of politicising the UK’s financial services sector in Brexit trade talks, after suggestions the bloc could shut the City of London out of its markets if the UK does not budge on other areas during negotiations.
A senior EU official told City A.M. that Brussels will only grant the British financial services sector access to its lucrative EU markets if it is “within our own interests” and if the UK shifts its position on key areas in trade talks, such as the EU’s fishing access to British waters.
It comes as the two sides began the third round of negotiations via conference call this afternoon, with a view to ratifying a free trade deal by 31 December.
Brussels only grants access to its markets if they agree to an equivalence regime with its trading partner.
This means the country seeking a trade deal must set similar financial services regulations as the EU.
It is crucial the City of London retains access to the EU as almost half of all debt and equity issuance for non-financial Eurozone firms between 2012 and 2018 came from banks based in London.
UK negotiators have been in the process of submitting documents to Brussels, who will now make an assessment by June on whether an equivalence rating can be granted.
However, a senior EU official told City A.M. that equivalence would not be granted if the UK chief negotiator David Frost did not give ground on other contested areas.
This is particularly true for the areas of fishing policy and the so-called level playing field for regulations, which have been major flashpoints in the first two rounds of negotiations.
“Just because we have made the [equivalency] assessment in June, does not mean we will make the decision in June,” the EU source said.
“The UK is requesting access to a massive market – we’ll act within our own interests and we will only sign up to a deal that is in our own interests.”
A spokesperson for the UK negotiating team hit back at the EU’s tactics by saying the “politicisation of financial services” was “in no one’s interests and the EU knows that”.
“The financial stability that underpins our and the EU’s economies depends on trust and predictability in relation to regulatory matters,” they said.
“There is no reason why the UK and EU would not be able to find each other equivalent across all regimes by June.
“We leave with the same rulebook and we both have third country equivalence frameworks to support cross-border activity.”
There will be one more negotiating round after this week’s talks, before the two sides will have a period to “take stock” of progress so far.
A source close to the UK negotiating team said it would be very difficult for talks to progress past this point if there had been no movement on fishing policy or level playing field discussions.
The EU is requesting that it retains the same fishing rights in UK waters as previously, while UK negotiators have consistently said this is not an option.
The level playing field is a demand from the EU that the UK must align its regulations to ensure British businesses do not have a future competitive advantage. In return, the UK would be able to trade tariff-free with EU member states.
So far, the camps are very far apart in their positions on both of these issues.
Shanker Singham, chief executive of trade law and economic policy consultancy firm Competere, said the EU’s tactic of using the City of London as a bargaining chip was not a strong strategy.
“I would expect that they would use whatever they could to get the deal they want, but I’m not sure how strong of a strategy that is though,” he said.
“Large firms from Europe need access to the City of London and if I was the UK, I would call their bluff.
“Most [UK] firms have assumed no-deal anyway.”