The UK is still not taking its financial services industry seriously
Negotiations may involve a degree of posturing, but as demonstrated with the plan to demand “permanent equivalence” with the EU over financial regulation, it is not clear what future the UK government wants for one of its most important industries.
A photographer managed to capture a document on the UK’s Brexit negotiation strategy for financial services on Monday. The timing appeared convenient, given that on Tuesday morning then-chancellor Sajid Javid wrote in the newspaper City AM about the City of London’s future outside the EU.
Neither the leaked strategy nor the article said much about market access for financial services across the English Channel once the Brexit transition period ends. In fact, they muddied the waters further.
The strategy is to demand “permanent equivalence” as an opening stance, meaning the EU and UK would recognise each other's regulatory regime as sufficiently similar as to allow market access in a range of areas over a long period.
This is a non-starter. The EU is not going to lose control over its ability to withdraw equivalence in case it worries the UK is diverging on financial regulation, or if it wants leverage when making demands in other areas. The EU’s chief Brexit negotiator Michel Barnier promptly rejected the idea on Tuesday.
Of course, both sides will often make uncompromising statements to begin with in a negotiation before meeting in the middle. And the UK has some power to demand a more stable and flexible equivalence regime than other countries enjoy, given the size and interconnectedness of its finance sector. The EU’s equivalence agreements are regarded as vulnerable to sudden withdrawal.
But the ridiculousness of the idea of permanent equivalence — implying that the UK can diverge from the EU in terms of the rules, while also maintaining full access — suggested that the government is playing to a domestic audience, making out that it is being cooperative while the EU is the stubborn one. It does not acknowledge the realities of the negotiations, nor does it help the City to plan, offering not the vaguest idea of a direction of outcome.
The next question is what the UK government does want for an industry that is far more important to the country than, say, fishing.
The document itself conceded that the final “landing zone” might be weaker alignment: either selective equivalence, or wide-ranging equivalence with a time limit. But any comprehensive equivalence agreement involves losing the power to diverge, and the government still appears not to acknowledge that.
Javid wrote in City AM on Tuesday morning that “findings of equivalence now, and measures to sustain trust and cooperation so they can endure into the future… offer the best solution to the question of agreeing our relationship with the EU this year. This is important not only in the short term, but to establish the norms and ways of working with the EU that will endure for the decades to come.”
But he also said: “We will no longer be rule-takers… We may choose to do things in the same way as the EU if it works for the UK. But there will be differences, not least because as a global financial centre the UK needs to keep pace with and drive international standards.”
Javid was replaced by Rishi Sunak on Thursday. Although his departure does not seem to relate to the government's Brexit policy for financial services, if anything, it could presage a more hard-line approach, as it appears to give more power to prime minister Boris Johnson and his adviser Dominic Cummings.
There is appetite for divergence in some areas of financial regulation, such as aspects of Solvency II affecting life insurers. And because firms have been preparing for no deal, there is now less upside to alignment for them.
But in other areas of EU regulation, it is unclear how or why the UK would want to diverge, and authorities have not given much of an explanation, beyond simply that they would like the freedom to be able to do so. Many regulatory frameworks followed across the EU were shaped in the UK, like MiFID. In other areas, the UK is generally not inclined to deregulate, or the standards to follow are global rather than regional, such as when it comes to bank capital regulations.
Another example is the mandatory buy-in regime, set to be introduced early next year. This is an obscure part of the rulebook, but the industry is worried that the regulation, which governs what happens when a securities trade fails, will cause bid-ask spreads to widen in bond markets. The timing of its introduction could make it a first test for Brexit divergence.
But the industry needs time to prepare for any change here, and this is an area of business where there is lots of cross-border volume. If the UK is going to diverge, it needs to signal that it intends to do so soon.
At the moment, the government is not being transparent about its choice for financial services. What should worry the City is the apparent lack of a plan behind the opacity.