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