Britain’s financial services sector faces a political battle to secure access to EU markets post-Brexit, industry experts have warned.
Miles Celic, chief executive of financial services group TheCityUK, and Nick Collier, the City of London Corporation’s representative in Brussels, told UK Lords on Thursday that negotiations on post-Brexit financial services arrangements were being driven by political concerns, rather than regulatory or legal issues.
The pair warned that EU officials could use so called “equivalence” rulings to drive business out of Britain and into the EU. The tool could also be exploited to pressure Britain to follow EU rules on financial services.
“Equivalence is becoming increasingly politicised,” Celic told the House of Lords EU Services sub-committee.
Equivalence is a formal recognition that overseas regulations are at the same standard or higher as local ones. Equivalence rulings covering financial services would allow UK companies to serve EU clients using local licences and from UK bases, rather than setting up EU-licensed subsidiaries.
The UK granted 17 “equivalence” rulings covering EU financial services ahead of Brexit. However, the EU granted just two decisions and both time-limited — UK firms have been allowed to conduct EU-linked central clearing for 18 months and settle EU securities for six months.
Colliers said it was “absurd” for the EU not to grant equivalence rulings, given that the UK adopted EU regulation onto its statue books wholesale ahead of Brexit.
“There isn’t really a technical case for not granting it, it’s really a political case,” he said.
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Celic said equivalence was used as a political tool to exert pressure in negotiations.
“You speak to those who’ve been involved in equivalence decisions before and sometimes they were technically driven but often it would be, as we were told, a file would be put on a senior person’s desk in Brussels and they would be told — often by somebody not involved in financial services at all — that there was a negotiation going on, whether it was on free trade or something else, with some country and they either wanted to use equivalence as a sweetener or as a leverage mechanism on that particular negotiation,” he said.
The UK and EU struck a “thin” free trade agreement on Christmas eve, averting a no-deal Brexit when the transition period ended on 1 January. The deal did not cover services, which make up around three quarters of the UK economy. Financial services were shut out of European markets at the start of the month as a result.
While the trade talks have now been settled, Celic and Collier said politics was still likely to pervade future decisions regarding financial services.
“I think there is a very clear view from many in the EU to use the lack of equivalence to force a lot of that business onshore,” Collier said. “You hear the phrase we need to ‘rebalance’.”
An estimated 7,500 finance jobs have left Britain since the Brexit referendum in 2016 and firms have moved at least £1.2tn ($1.6tn) of assets to the EU, according to EY. Almost €6bn(£5bn, $7bn)-worth of daily share trading activity left London on 4 January, the Financial Times reported, as new post-Brexit rules came into effect.
The ebb of jobs and assets away from Britain will worsen the EU holds out on granting equivalence, Celic said. He warned that many changes would prove irreversible.
“The longer we don’t have equivalence on the EU side, the more the concrete will set,” he said. “Companies will have moved people, got regulatory licenses, moved capital. Once that is done, those are costs that companies have incurred. There are therefore further costs of shifting back.
“This is much more complex than a sort of binary on-off switch of equivalence.”
Celic said there was a debate among EU officials between prioritising market location and market efficiency. Advocates of market location — locally-based financial services — were currently winning the day. He highlighted a speech by France’s finance minister Bruno Le Maire in November that talked about building up the financial capability of Europe.
“I am sceptical that [talks] will open up those in capital markets, which from the EU perspective is significant,” Collier said. “So much of the capital market activity in euros in currently in the UK and there is clearly a political and regulatory push to onshore it.”
Celic said equivalence decisions were also being held up by a “misplaced concern” that the UK would conduct a “bonfire of regulations” as soon as it left the EU.
“We get asked all the time: so you’ve taken back control, what are you going to do with it?” Collier said. “How are you going to diverge?”
Celic said deregulation was unlikely and the UK in fact had higher standards of finance regulation than the EU at the moment.
“I don’t expect a radical divergence on either side,” he said.
Even still, EU officials are likely to use equivalence rules — which can be unilaterally and summarily withdrawn — to ensure Britain sticks close to European rules in future.
“Nick and I were in a meeting before Christmas with a very senior EU official who said: look, what you need to understand is, we look at equivalence as a way of managing alignment, a third country aligning with EU rules and remaining aligned with EU rules,” Celic said.
Bank of England governor Andrew Bailey last week said Britain should avoid becoming a “rule taker” on financial services at all costs.
“If the price of this is too high, we can’t just go for it,” he told MPs. “I would strongly recommend that we don’t become a rule taker. If the price of that is no equivalence, then I’m afraid that will follow.”
Celic signalled TheCityUK’s view was equivalence should be pursued regardless of the cost.
“Our view is, firstly, the fewer the barriers, the fewer the hurdles, the lower the cost, the more effective that is, the greater the efficiency,” he said.
The EU and UK are beginning discussion this week about a “memorandum of understanding” covering financial services, which would establish formal communications between regulators on both sides of the channel. Negotiators have committed to trying to reach an agreement by March.
While the talks do not cover EU equivalence rulings, industry figures hope an agreement would help pave the wave for greater access. Celic said a memorandum of understanding would be “necessary but not sufficient part of the longer-term relationship.”
“The real underpinning of this has to be a negotiation based on trust on each side,” he said.
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