Brexit UK must not cede control of City

The phoney peace is shattered. Long-standing tension between the treasury and the Bank of England on how the UK’s financial services should be regulated after Brexit has become increasingly public.

The treasury, keen to keep as much of London and its juicy tax revenues as possible in Britain, wants to hew closely to EU regulation to maintain business with the EU27. The Bank of England, concerned about being a ruletaker, wants more autonomy. Assuming the UK does leave the single market overall, the bank’s philosophy is more convincing. Even if the City loses some business overseas, the gains for financial stability and regulatory independence are likely to weigh more heavily.

The Bank of England and the treasury have united behind “bespoke dynamic mutual recognition”, where the UK would agree regulatory outcomes with EU authorities and then the central bank would continue to set its own supervisory rules. This plan seems quixotic. The EU dislikes mutual recognition of any regulation with third countries and chief EU Brexit negotiator Michel Barnier has ruled it out. Unless the EU changes its mind on mutual recognition, and if the UK leaves the single market and moves towards regulatory independence, it seems likely some of the City’s business will depart. So be it.

The choice between autonomy and market access exists for financial services as for the rest of the economy. In an area in which the UK has clear comparative advantage and the EU will regulate in its own interest, Britain’s ability to set its own rules assumes particular importance. London, May 30