Deal or no deal, the City can still pros­per af­ter Brexit

The Daily Telegraph - Business - - Business Comment - BARN­ABAS REYNOLDS Barn­abas Reynolds is a UK and EU reg­u­la­tory lawyer at Shear­man & Ster­ling

The UK fi­nan­cial sec­tor’s fu­ture can be brighter than ever af­ter Brexit. For that the UK must now take the steps to make it so. The in­dus­try must make its plans work with the grain of what the UK can re­al­is­ti­cally and eas­ily de­liver upon.

De­spite the EU hold-up on start­ing trade talks, the out­lines for a win-win deal for both the UK and the EU are now clear. The prize is great for each. Con­tin­ued free trade with the UK would give EU cus­tomers ac­cess to the world’s mar­kets and cap­i­tal flows on their doorstep and al­low the UK in­dus­try to con­tinue to act as a cost-ef­fi­cient con­duit between the EU and the rest of the world.

There are two pro­posed ways of mak­ing this a re­al­ity. The first, pre­pared by me af­ter much con­sul­ta­tion with peo­ple work­ing in the sec­tor, is based on the ex­ist­ing EU le­gal con­cept of equiv­a­lence. That is al­ready the ba­sis for some EU fi­nan­cial ser­vices trade with the US, Sin­ga­pore, Mex­ico and many other coun­tries around the world. I have now pub­lished fully worked-out draft leg­is­la­tion and a draft bi­lat­eral deal un­der­pin­ning such an ar­range­ment, which would pro­vide the le­gal ba­sis for both sides.

The equiv­a­lence con­cept al­lows non EU-based busi­nesses to op­er­ate within the EU, su­per­vised solely un­der their non-EU laws. The pro­posal ex­pands this con­cept to fill in gaps and im­prove the pro­cesses. Such a scheme would per­mit each party’s laws to di­verge, tai­lored to lo­cal sit­u­a­tions. The EU has of­ten made clear that equiv­a­lence de­ter­mi­na­tions should be based on reg­u­la­tory out­comes – on the ef­fect of a reg­u­la­tion, not the minu­tiae of rules and pro­cesses. In­ter­na­tional stan­dards with which both the UK and EU com­ply could pro­vide for many of the out­comes. The main re­straint is that no laws can be seen as equiv­a­lent if they in­tro­duce sys­temic risk into the other party’s fi­nan­cial sys­tem. Sales to re­tail cus­tomers in the EU would need to com­ply with EU con­sumer pro­tec­tion mea­sures as well as UK law, just as UK sales to other states do. UK-based busi­nesses would con­tinue to have the right to es­tab­lish branches in the EU and vice versa.

An­other op­tion, from the In­ter­na­tional Reg­u­la­tory Strat­egy Group (IRSG), aims for a new con­cept for mu­tual recog­ni­tion. This would achieve a sim­i­lar re­sult to the out­comes-based equiv­a­lence ap­proach just de­scribed. Ei­ther propo­si­tion could be made to work well. My con­cern with in­vent­ing a new con­cept such as the IRSG pro­poses is its po­ten­tial to open a Pan­dora’s box of new ne­go­ti­at­ing points. That could ul­ti­mately lead to a weaker so­lu­tion or an at­tempt by the EU to re­strict the UK’s ap­proach to tax, com­pe­ti­tion and other ar­eas of pol­icy, which has long been a con­cern for the French. Such fet­ters should be strongly re­sisted, whichever route is fol­lowed. It is not re­quired by the EU’s ex­ist­ing equiv­a­lence ar­range­ments and would be dam­ag­ing to the UK and the global mar­kets. The sec­tor should, how­ever, also have a Plan B and be ready for no deal. Far from be­ing a bad sce­nario, the UK fi­nan­cial sec­tor can seize the op­por­tu­ni­ties this of­fers to re­in­force its po­si­tion as a global fi­nan­cial cen­tre, ri­valled only by New York. The steps are straight­for­ward.

First, UK busi­nesses would help their EU cus­tomers to con­tinue their ac­cess to fi­nan­cial ser­vices from the City. This could ei­ther be by cus­tomers open­ing low-cost places of busi­ness here – a small of­fice – or by us­ing EU reg­u­la­tions that per­mit EU cus­tomers to ac­cess fi­nan­cial ser­vices and prod­ucts from the wider world on their own ini­tia­tive, now to be ex­panded from early 2018. Th­ese ac­cess routes are well es­tab­lished. Like other de­vel­oped ju­ris­dic­tions, the EU recog­nises that in­ward fi­nan­cial flows are crit­i­cal.

Sec­ond, the sec­tor could do even bet­ter than now, pro­vided the UK Govern­ment gives a help­ing, not hin­der­ing, hand. Un­der a “no deal” sce­nario tax in­cen­tives could off­set any costs in­curred by UK busi­nesses in help­ing EU cus­tomers to ad­just the way in which they buy UK fi­nan­cial ser­vices. More broadly, the UK could play to its strengths and start mov­ing away from the red tape of pro­cess­laden EU rules to make for a more dy­namic yet still safe mar­ket. What would get things mov­ing? A change of mind­set is needed. Scaremongering that this sec­tor, with tril­lions of pounds worth of ex­ist­ing de­riv­a­tives con­tracts between UK and EU coun­ter­par­ties, faces a “cliff-edge” if there is no deal in March 2019 must stop. The claim is that con­tracts could sud­denly be­come il­le­gal be­cause of EU rules on “au­tho­ri­sa­tion”, which would spring back up on Brexit. But this fails to re­flect the true po­si­tion in law. It fails to recog­nise the op­er­a­tion of pub­lic in­ter­na­tional law, the Euro­pean Con­ven­tion on Hu­man Rights and the EU Char­ter of Fun­da­men­tal Rights. Each of th­ese, in its own way, pro­vides for the pro­tec­tion and con­tin­u­a­tion of con­trac­tual rights at the point of Brexit, deal or no deal. More­over, by build­ing cer­tain ad­di­tional pro­tec­tions into con­trac­tual ar­range­ments now, busi­nesses could pro­vide for many dif­fer­ent types of fu­ture ac­tion post Brexit.

In ad­di­tion, the more gen­eral dooms­day warn­ings must be seen to be as far-fetched as they are. It is said that with­out a two-year (at least) tran­si­tional pe­riod to en­able ac­cess to EU cus­tomers to con­tinue as now or­gan­ised, busi­nesses will be forced to face costly change. But this gloomy line fails to recog­nise that busi­nesses can con­tinue to ser­vice EU cus­tomers with­out any deal, based on rel­a­tively mi­nor ad­just­ments to cur­rent ar­range­ments. Reach­ing an ac­cept­able tran­si­tional deal may not be pos­si­ble given that each side has dif­fer­ent po­lit­i­cal ob­jec­tives. It may be fraught with dif­fi­culty and may never oc­cur. Or it may end up be­ing too lit­tle, too late – “an 11th hour deal” that brings the worst of all worlds.

Above all the pri­or­ity must be to fo­cus on tak­ing ad­van­tage of Brexit to en­sure the long-term suc­cess of the global mar­kets.

‘The more gen­eral dooms­day warn­ings must be seen to be as far-fetched as they are’

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