Britain must avoid tying Brussels up in red tape or antagonising its soon to be former European Union partners and the United States if it is to maintain access to the bloc’s financial services market after Brexit.
At risk is Britain’s biggest financial services export market, which was worth a record 26 billion pounds ($33.45 billion) last year out of total sector exports of 60 billion pounds.
Brexit will mean banks, insurers and asset managers in Britain losing the unfettered access to the bloc’s customers they currently have under EU “passporting” rules.
However a transition deal, if it can be agreed between Britain and the rest of the EU, would allow passporting to continue after Brexit next March until the end of 2020. After that, a new trade agreement covering all economic sectors would be needed, although its outline has yet to be agreed.
Britain is seeking future financial trade based on a more generous version of the existing equivalence system for firms from non-EU states, such as the United States and Japan, where domestic regulation is aligned closely enough with the bloc’s.
Karel Lannoo, chief executive of Brussels think tank CEPS, said accommodating Britain would put political pressure on the EU to improve access for other non-EU states and annoy Norway, which pays for EU market access.
“Brussels does not want to open a Pandora’s Box as they would have to give the same treatment to other third countries like the United States. Norway will also say what is the purpose of the EEA,” Lannoo said, referring to the European Economic Area.
Seventy percent of financial services currently passported between EU states are not covered by equivalence, including commercial lending, deposit taking, payments, asset management and core insurance, meaning firms must pay up to open new EU hubs or face a severe loss of market.
Brussels knows it is treading a delicate line when it comes to amending equivalence – it has already had clashes with the United States over clearing houses, and with Switzerland over stock exchanges – and U.S. regulators warn that their equivalence agreements must not be disrupted by Brexit deals.
Around 100 EU rules would need amending to broaden equivalence, potentially tying up EU legislators for years.
Britain’s finance ministry has asked the City and experts like Rachel Kent, a partner at Hogan Lovells law firm for advice on how to enhance equivalence, Reuters reported last month.
“We have to know what to ask for. We are already fully aligned with the EU. It’s about taking items out rather than putting things in, and that should make it a much quicker process,” Kent said, adding that the sector is now stress testing the government’s proposals for financial services.
European Commission officials told Reuters in June there were no plans to go beyond the limited changes already proposed, a hardset position viewed by the City as standard negotiating tactics.
Changes made to equivalence so far are viewed in London as a Paris-backed drive to restrict access so that more UK firms open new EU hubs benefitting Paris, Frankfurt, Dublin or Luxembourg.
“France is conveniently portrayed as the on-duty villain, but Germany and in fact most of the core EU and part of the rest think it would be unjustifiable and unacceptable that the UK keeps the advantages of the single market after having left it,” said Jacques Lafitte, a former EU official who helped create the euro.
Time for approving changes is also running out as the European Parliament goes to the polls next year and a new European Commission is appointed, meaning a legislative hiatus.
But consultants say the EU is unlikely to turn off the tap to UK financial services after 2020 as it needs to build up its own capital market after decades of City dominance.
“Does the EU want to see enhanced access continuing between the EU and UK? Almost certainly in the short term,” said Andrew Pilgrim, government financial services leader at consultants EY.
Still, few believe the EU will offer Britain a binding commitment to expand equivalence.
“The City kids itself by hoping for anything better than ‘normal’ equivalence,” said Lafitte, who now advises financial firms on EU policy in Brussels.
Others say the bloc may at least change how it administers the process. Britain says the 30-day guillotine or notice period for withdrawing access – which has never been triggered – makes equivalence unreliable.
“I suspect that a withdrawal period of a year or two instead of 30 days will make its way into the EU equivalence regime,” Kent said.
Brussels-based consultants say that Britain would have to make commitments in return for broader equivalence, such as promising not to compete unfairly.
Some EU officials worry that Britain will dilute financial rules to bolster the City of London’s role as a global financial centre. Bank of England Governor Mark Carney has suggested that the cap on bankers’ bonuses imposed by the EU and long opposed by Britain, could be changed after Brexit.