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Brexit white paper deals 'real blow' to City bosses as patience wears thin

Lucy Burton
There are fears that the UK's financial services sector will become a 'rule taker' of Brussels - AFP

City bosses are losing patience over the Brexit talks after Theresa May's long-awaited white paper shows that the model they were after is off the table. 

The financial services sector had hoped UK and EU firms would enjoy a mutual recognition of rules post-Brexit, after an extension of passporting rights which currently provides full access to EU markets was ruled out. 

However the UK is instead opting for a new arrangement that would expand on the EU's so-called equivalence regime. The idea has raised concerns in the City in recent weeks amid fears the country's financial services sector would become a 'rule taker' of Brussels. 

Lobby group TheCityUK called the decision "regrettable and frustrating" while the City of London Corporation said it was a "real blow" for the sector and could make it more difficult to "create jobs, generate tax and support growth across the wider economy".

The UK financial services sector accounts for around 11pc of UK economic output and last year contributed £72bn in tax. Around £1.4 trillion of assets are also managed in the UK on behalf of European clients. 

Brussels' chief negotiator Michel Barnier has repeatedly made it clear that a mutual recognition deal would be "cherry picking" an agreement, forcing UK officials to consider alternatives.

One City source said he felt frustrated as Brussels did not come up "with a compelling reason for why mutual recognition couldn't work from a technical perspective".

"It's purely about politics," he said. 

Brexit | What's the difference between equivalence and mutual recognition?

Another senior executive said he doesn't care what the model is called as long as his bank can continue doing business in the EU once the UK leaves. 

"Mutual recognition, enhanced equivalence – these are just words," he said. "I want to know three things: can we cover our European clients from London, can we write European business in London and can we manage the risk of those contracts from London? It's a sliding scale.

"If the answer to that first question is no, we will have to have a few more bankers in Europe; if the answer to the last is also no, we will have to move a lot."   

Rachel Kent, head of financial institutions at Hogan Lovells, agreed that the decision was a blow for UK finance but said that if the current equivalence regime could be tweaked to deal with the City's concerns it "could be workable". 

"There is no sign of that at this stage," she said. "There remain issues that would be harder to deal with under the equivalence regime than a trade agreement, not least the jurisdiction of EU law." 

The UK prime minister is under pressure to meld together competing visions of Brexit Credit: Chris J. Ratcliffe/Bloomberg

However not everyone in the City was disappointed on Thursday. Barney Reynolds of US law firm Shearman & Sterling said "you can get exactly where the City wants on this model" provided there are certain adjustments. 

Ben Pott, head of government affairs at Nex Group, added that the paper includes some benefits for day one of post-Brexit Britain as any mutual recognition approach would have had to be produced from scratch. 

"With time running out, this is not realistic," he said. "The Government is proposing that there should be reciprocal recognition of equivalence under all existing third country regimes. This proposal itself can only be a good thing and if accompanied by a broadening of the scope, it could at least avoid the dreaded cliff-edge scenario."