Last month the UK Treasury began talks with the EU to put in a place a memorandum of understanding for future financial services regulation on each side of the Channel.
Much of the media discourse about these talks revolve around whether they will yield extended EU market access for the City of London, however any suggestion of this has been shot down by both sides.
With no wide ranging access agreement on the table, known as equivalence, then what is the point of these talks and why are they being held?
Financial services and the Brexit trade deal
The post-Brexit trade deal did not include provisions for any kind of services, financial or otherwise.
This is despite services making up a whopping 80 per cent of the UK’s economy.
This means that the City of London lost its EU-wide access to European markets and now have to rely on a patchwork of regulations from individual countries.
Major banks had been prepared for this scenario, leading to an estimated £1 trillion in assets and thousands of jobs moving from London to EU financial capitals since the 2016 Brexit referendum.
The only way the Square Mile can regain its pre-Brexit access is if the EU grants the UK regulatory equivalence in about 40 different areas.
This is only granted if Brussels believes the UK’s financial services sector will remain in the regulatory orbit of the EU in each area – now considered an unlikely prospect.
The EU did grant equivalence for London’s clearing houses to continue operating throughout the bloc on a temporary basis, which was considered crucial to maintaining financial stability.
The UK went ahead and unilaterally granted equivalence for EU firms to continue to operate in the UK for about half of the 40 areas.
What are the memorandum of understanding talks?
The UK-EU trade deal did include a small passage that committed the UK and EU to come to a “memorandum of understanding” on financial services.
Downing Street has said on numerous occasions that it wants these talks wrapped up by the end of March.
The talks aim to put in place an agreement so that financial services regulators in the UK and EU share information and have open dialogue when making new regulatory decisions.
One source close to the talks last month likened the process to setting up “a talking shop”.
City of London lobby group CityUK released a summary of what it would like to see from the talks last week.
“Key objectives should be to establish regular structured dialogue, including transparency, clarity and certainty on the unilateral processes of adoption, suspension and withdrawal of equivalence decisions,” CityUK said.
Will equivalence be granted?
Equivalence is a process that is decided unilaterally and is not up for negotiation in the memorandum of understanding talks.
Many media outlets have deemed the memorandum of understanding talks as “equivalence negotiations” or similar, which has caused frustration in the Treasury.
One source told City A.M. that the Treasury wants to “temper expectations” and that “too many media stories incorrectly talk about the talks as if equivalence is in play”.
The EU has asked the UK Treasury for extra information on its intentions for future financial services regulations to make a determination on equivalence.
Bank of England governor Andrew Bailey told a Westminster committee that this demand was “problematic” and that there was three potential reasons for it – “only one of which is sensible”.
“The first motivation would be the EU thinks the rules should never change – that’s obviously mad and I don’t believe that’s what they think because they actually review and change their own rules,” Bailey said.
“Secondly, they think our rules should only change when their rules change and we’ve discussed this many times – this would be rule taking, which we obviously don’t support.
“The third one, the sensible one, is that both of us will change our rules when it’s sensible to do so, we’re both transparent about it, but obviously we’ll be transparent at the time and transparent to everybody. It’s nothing unique and that seems to me the sensible basis and that’s the basis to judge equivalence.”
Lord Jonathan Hill, the UK’s former financial services commissioner to the EU, told the Financial Times last week that EU would “not do us any favours” and that it was certain Brussels will not grant equivalence for British firms.
He said: “Given that their strategy is to build up the EU, why on earth would they?”