Britain and the European Union must find a way to settle disagreements over how the UK’s finance industry can do business with the bloc without it descending into a “metaphorical punch-up”, said incoming Bank of England governor Andrew Bailey.
Bailey, who is currently head of the Financial Conduct Authority, also said it would be “hard to imagine” the UK not being granted equivalence by the EU after the post-Brexit transition period ends in December.
Appearing before a House of Lords committee, Bailey said that the bigger challenge would be establishing how the two sides deal with the inevitable divergence and disagreements that would arise.
Under current EU rules, the bloc can grant equivalence to countries which it deems to have a regulatory framework as stringent as its own, but can also unilaterally withdraw that equivalence with 30 days’ notice.
“You would want to have a mechanism to say OK, let’s sit down and talk about what we’re doing here,” said Bailey, who is due to take over from Mark Carney in Threadneedle Street in March.
“If that ended up in a sort of metaphorical punch-up every time and a threat to withdraw equivalence, that process would just not work properly.”
Bank of England deputy governor Sam Woods, who spoke at the same hearing, said the risk that the EU could withdraw equivalence with just a month’s notice would deter cross-border activity.
“The firms are going to be quite reluctant to put much weight on it so I do hope that it will be possible to agree something more durable,” he said. “But whether that will be the case in the negotiations, hard to say.”
Woods said that the UK should be “concerned” about the possibility of the bloc taking a “mercantilist” approach to regulatory disputes in a bid to grab business from London.
“It is something that we should be concerned about, because plainly I think it could occur,” he said.
Chancellor Sajid Javid has said he wants to reach a long-term agreement on financial services with the EU, but that Britain must also be able to set its own rules.
Financial firms have raised concerns that their access to the bloc after December will be dependent on a broader trade-off in negotiations with the EU, such as Britain allowing fishing in its waters.
Michel Barnier, the EU’s chief negotiator, said yesterday that British politicians should “not kid themselves” that Brussels will grant a special position to the City.
“There will not be general open-ended ongoing equivalence in financial services, nor other management or financial agreements with the United Kingdom,” Barnier said.
“We will keep control of these tools, and we will retain the free hand to take our own decisions.”