Britain’s finance industry is appealing for greater access to the European Union single market, amid fears that politics could leave large parts of the City of London shut out of Europe for good.
TheCityUK, the industry group for UK financial services, this week published a paper outlining the “key outstanding issues” facing Britain’s financial and professional services industry. Chief among them are uncertainty about regulatory cooperation between UK and EU watchdogs, rules on data handling, and so-called equivalence decisions.
“We urge both the UK and the EU to move quickly and get these additional agreements in place,” said Miles Celic, chief executive of TheCityUK.
Financial and professional services firms were left out of the Brexit deal struck on 24 December, which instead focused on movement of goods. UK and EU leaders have agreed to ongoing talks covering finance.
The biggest issue facing the industry is equivalence — a legal mechanism whereby foreign rules are recognised as equivalent to local ones.
Britain is seeking between 28 and 40 equivalence rulings from the EU depending on how you view the regulation. The most important decisions revolve around Europe’s MIFID II regulation, which covers investment banking activities.
The UK granted several equivalence rulings in November, which allowed EU firms in Britain to abide by home state rules.
The EU has so far not reciprocated. The bloc granted the UK equivalence in just two areas: central clearing and securities settlement. Both decisions were taken to avoid financial stability issues and were time limited.
The failure to grant equivalence forced many businesses to either stop serving clients in the EU or set up new offices in the bloc that could handle their business. The EU has so far held a hardline against firms that failed to relocated staff and asset ahead of the 1 January Brexit deadline.
There are fears in the City of London that equivalence could be withheld by the EU to force more business into the single market. Celic told a UK House of Lords committee last month the issue was becoming “increasingly politicised.”
Europe has not hidden its desire to “rebalance” business away from London in the wake of Brexit. Last month, the European Commission launched a policy to improve the “strength and resilience of Europe's economic and financial system,” which included discussion of moving EU-denominated clearing activity into the EU.
London clearing houses have traditionally been the central hub of the multi-trillion euro derivatives market. Andrew Pilgrim, who leads the UK government and financial services team at EY, said the EU urged finance firms to “make sure they were bringing some of the business out of the UK into the European Union,” when it granted temporary equivalence to UK clearing houses.
“We will be looking within the European Union to see how we can move those critical infrastructures within the EU,” Mairead McGuinness, European commissioner for financial services, told Bloomberg last month.
Last week the EU granted equivalence to clearing houses in the United States, a move seen by some as part of a broader plan to undermine London. The US equivalence decisions means firms can move business to New York if necessary when the temporary UK equivalence ruling expire in 18 months time — a halfway house towards more lasting change.
“This feels like open commercial and financial warfare between EU and UK,” David Buick, a longtime UK financial commentator, wrote on Twitter. “EU getting in too many blows - some below the belt.”
Many executives and lawmakers argue it is in Europe’s interests to grant equivalence. Without it, markets will become more fragmented and customers in both the UK and EU will likely pay higher prices.
“Allowing these issues to drag on will only disadvantage citizens and businesses on both sides of the Channel,” Celic said.
However, that may be a price EU leaders are willing to pay if it contributes to the longterm ambition of improving the bloc’s financial firepower.
“You’ve got the EU, on equivalence front, thinking about its own sovereignty,” Pilgrim said. “Where does it want to beef up its capabilities? Where does it not want to be reliant on a third country? The politics of it all are probably the biggest driver of equivalence determinations, I suspect.”
Publicly, EU leaders say equivalence has been held up by concerns about a bonfire of regulation in Britain.
“The future hinges on us understanding fully how our partners the United Kingdom expect to continue now that Brexit is an absolute reality,” McGuinness told Bloomberg. “We have heard words like deregulation.”
“The Europeans won’t want to be making equivalence decisions that they then have to talk about revoking in six months time,” Pilgrim said.
The UK and EU have committed to agreeing a memorandum of understanding on regulatory cooperation by March. Any equivalence decisions will follow after that. EU commissioner McGuinness told Bloomberg there was no fixed timetable. Equivalence decisions are taken unilaterally, rather than through negotiation, leaving the UK at the whim of policymakers in Brussels.
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“There is no reason why these equivalence decisions should be held up now,” Catherine McGuinness, a City of London deputy, told Yahoo Finance UK. “We’re starting from a position of exact equivalence. We helped draft the regulation.”
But she added: “I don’t think we’re seeing signals that they’re going to be issuing equivalence rulings anytime soon. I’m confident that it ought to be a simple matter but I’m not confident that we will be seeing them shortly.”
The EU is under no obligation to grant equivalence. Jose Manuel Barroso, the former head of the European Commission and now an advisor to Goldman Sachs, said last week he did not think the EU would grant access at all.
“I personally believe that there will be no permanent equivalence decision on the side of European Union, regarding financial services,” he said at a virtual event.
Hopes on the British side are muted.
“I don’t think expectations are high that we’re going to get a full suite of equivalence decisions across the industry,” Pilgrim said.
Even in the best case scenario, the City of London will still not enjoy the same access it had pre-Brexit.
“What we saw at the end of December was the end of passporting — that ability to provide cross border services very simply — and no real mechanism to replace it,” Pilgrim said. “Even if there are a full suite of equivalence decisions eventually, it doesn’t provide the same degree of access that we would have last seen on 31 December.”
Equivalence only covers wholesale finance. Retail banks in London won’t be able to provide current accounts, loans, or other services to everyday customers in the EU. Last year several UK banks wrote to Brits living in Spain to warn them their accounts would be closed.
Equivalence decisions can also be withdrawn at little notice, leaving firms in a precarious position.
Celic said the finance industry was “pragmatic about the increased friction to trade and cross-border transactions which have resulted from Brexit, but we should still seek to minimise this wherever possible.”
Many in London are optimistic about the future prospects for the City even if the EU disappoints. They point to emerging growth areas such as fintech and green finance that aren’t reliant on existing regulation.
However, the longer the UK’s finance industry remains stuck in limbo with the equivalence question hanging above it, the greater the risk of jobs and assets leaving the City. Around 7,500 finance jobs have left Britain since the country voted for Britain in 2016 and over £1.2tn of assets have been transferred to the EU, according to EY.
“London is a major financial centre — that will not change overnight,” McGuinness told Bloomberg last month. “But it’s also important to acknowledge that it’s significant was part and parcel of being within the European Union. Change is coming.”
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