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May's Brexit plan is a 'real blow' to City

Theresa May’s Brexit white paper has left City firms concerned over what it means for the services sector. Photograph: Reuters

Theresa May has delivered a “real blow” to the City in her plans for the UK’s relationship with the EU after Brexit, it was being warned within minutes of the government’s white paper being published on Thursday.

Catherine McGuinness of the City of London Corporation said the loosening of the relationship with the EU proposed in the government’s much-anticipated Brexit white paper would damage the financial sector.

“Time is running out so it is essential that the pace of negotiations accelerates to ensure an orderly Brexit,” said McGuinness, who chairs the policy committee of the local authority which covers much of London’s financial district.

The 100-page white paper raises the prospect of a new economic and regulatory arrangement for financial services but has left bankers concerned about what this entails.

Miles Celic, chief executive of lobby group TheCityUK, said it was “urgent” that a deal was clinched for the City and that it was “regrettable” that one of the key ideas to preserve the  financial services industry – known as “mutual recognition” – had been dropped.

Why does it matter?

The white paper sets out the extent to which UK and EU have interconnected markets; UK-located banks underwrite around half of the debt and equity issued by EU businesses; UK-located banks are counter-party to over half of the “over-the-counter” interest rate derivatives traded by EU companies and banks; and about £1.4tn of assets are managed in the UK on behalf of European clients.

It cites one study that found that if barriers are erected to this trade it could increase costs for consumers and businesses.

The services sector – not just finance but other elements such as lawyers and accounts – makes up about 80% of the UK’s economic output and employs 4.6 million people.

What did the City want?

In the immediate aftermath of the referendum result, many in the City had hoped that  “passporting” could have been retained. This is the means by which firms in one EU country can operate in another. Data published by the City regulator, the Financial Conduct Authority, in September 2016 showed this worked both ways: some 5,476 UK registered firms use a passport to operate inside the broader European Economic Area – the EU plus Iceland, Liechtenstein and Norway – while more than 8,000 used a passport to conduct business in the UK.

This hope was dashed once Theresa May made it clear last year that the UK was going to leave the single market. So officials started to push for “mutual recognition”, the recognition of each other’s regimes which means that the sector would have hoped to have carried on as usual as much as possible after Brexit.

Celic said: “The overriding issue for financial services and related professional services firms is the ability to continue serving customers and clients. Mutual recognition would have been the best way to achieve this. It’s therefore regrettable and frustrating that this approach has been dropped even before making it to the negotiating table.”

What is the City getting?

According to the white paper, the UK proposes “a new economic and regulatory arrangement with the EU in financial services”. The aim is to facilitate trade and also preserve regulatory supervision of the sector, protect consumers and maintain financial stability.

Instead of  “mutual recognition”, it outlines a scheme based on the agreements the EU has with countries outside the trading bloc – known as “equivalence”. Under this regime the EU acknowledges that the country’s rules are similar to those inside the bloc.

The white paper indicates that the government wants something more detailed than the current framework and said the new economic and regulatory arrangement was being “based on the principle of autonomy for each party over decisions regarding access to its market”.

Celic said this acknowlegement that the current regime needed enhancement  was reassuring as the current system “does not meet any of the requirements for success”.

Stephen Jones, chief executive of the lobby group UK Finance, agreed that the government was right to want to try to strengthen the regime as the  existing equivalence agreements “will not provide financial institutions with effective market access that enables them to serve their customers”.

McGuinness said: “This sector has been clear since the referendum. Equivalence in its current form is not fit for purpose so any enchantments to this regime would have been substantial.”

Among the concerns is that the EU can pull an agreement at 30 days notice and Andrew Gray, head of Brexit at accountants PwC, said that the EU’s current approach to equivalence does not cover activities such as insurance and taking in savings.

What happens next: plan for no deal?

The haggling starts with the EU. City firms have already started to make plans to move staff back to the EU ahead of end of March 2019 when the UK will leave the EU.

And, as the government was unveiling its white paper, the pan-European regulator for securities markets ESMA was urging firms which need to relocate to the remaining 27 member states to make an application as a soon as the end of the month to secure approval from local regulators.

Gray said that while the government’s proposal for equivalence was credible, “businesses should know that there is still a risk of no deal and therefore should continue to plan for this scenario.”