Competing views
The City’s single voice has become a cacophony on Brexit
The City has never been a single, homogenous entity. It comprises myriad different businesses that make money in myriad ways. Unsurprisingly, this gives rise to different priorities. Those difference are becoming increasingly apparent as the UK’S financial industry struggles to weigh the various trade-offs involved in negotiating the country’s relationship with the European Union after Brexit.
In the run-up to the referendum, the City more or less spoke with one voice, loudly and repeatedly saying: Remain. In the immediate aftermath of the vote, the industry’s various trade bodies maintained a united front as the City attempted to work out how to maintain access to clients in the EU.
The UK’S financial industry failed in its collective effort to persuade the UK and the EU of the merits of “mutual recognition” of each other’s regulatory regimes. This would have involved agreeing that the two rule books could differ, which acknowledging that they were as good as each other.
However, that attempt failed. Now, as Brexit has drawn nearer (even though it has now been delayed), cracks have started to appear. This is not wholly surprising. An asset manager’s best Brexit is not the same as that of a large bank or an insurer. Neither quite square with the systemic priorities of the Bank of England.
Differences are emerging over the different forms of Brexit to lobby for. One option would be to accept the City’s status as a rule-taker, in a Norway-style arrangement where the UK’S current level of EU market access is maintained. This is the option favoured by big US banks, for instance.
The alternative, and the official Government position based on the Political Declaration, is the opaquely termed “enhanced equivalence”. This is a looser relationship that makes the nature of market access less secure and more limited. Passporting, for
instance, where an institution can offer services anywhere in the EU from a base in the UK, is off the table. That would be a big loss for retail banking. The only way to keep passporting would involve signing up to the Single Market. That would require an about turn on the Government’s immigration red line: freedom of movement must end, according to its Brexit position.
The only other slim chance of maintaining something approaching current levels of market access would require an uncomfortable compromise from the EU. It could take the form of an association agreement – a luxury normally only afforded to accession states. Brussels is not keen.
Feeling let down, large banks are making sure not to rely on the efforts of traditional City lobbying groups. They are now going directly to the Treasury with their concerns.
The call from the Treasury to gather intelligence from the City on its post-brexit hopes is meant to bear fruit next summer, if the Withdrawal Agreement somehow gets through parliament, and the UK enters into a transition period.
While Theresa May’s Brexit deal is effectively “no deal” on services, US banks are still hoping that some fudging might be possible through a “Norway for now”-type arrangement. This would avoid banks having to set up (or staff up, for those who have already set them up) new subsidiaries on the continent to maintain access to EU markets.
Talk to US trade negotiators, or American members of the clearing or insurance industry, however, and they are split on similar lines to the City as a whole. For some parties, being able to rewrite rules is hugely important.
The US would have a more independent ally at the G20 when it comes to steering a course against market fragmentation in areas such as derivatives. Banks with larger footprints in the UK and beyond the EU are keen to avoid being subject to a regime of regulation over which they would have little say.
Tax is a flashpoint here: the imposition of higher or additional levies on financial transactions by Brussels is causing as much concern in Washington as the UK’S talk of taxing tech giants.
The EU’S Solvency II rules, which dictate how much capital insurers need to hold, are a big reason why insurers are keen to avoid rule taking. The Association of British Insurers’ response to the Government’s White Paper on a future relationship last year was telling: “Whatever the final outcome, the insurance industry is too important to be a rule taker.
“Having to comply with financial regulations we have no say over would be the worst possible scenario for our world leading insurance sector, so we will look to the Government to negotiate a better outcome than this.”
The financial services sector would like to inform the Treasury’s planning for the post-brexit relationship. However, the timelines of the City and Whitehall are different.
The Treasury has next year in its sights, but the City’s numerous and competing voices are looking to Oct 31: the end of the Brexit “flextention”.
There still remains a belief among many interested parties that, although the risk of no-deal Brexit has already resulted in assets and jobs leaving the City, there is still much to play for before the autumn deadline.
With Labour and the Prime Minister seeking common ground on the area where Brussels might accept some changes to its negotiated position, financiers are hoping some leeway might be found. Ultimately, the real question is how enhanced any equivalence might end up being. That in turn will determine who holds the pen on the rules, and the true price of market access.