Issue of the week: the City, post-brexit

The Chancellor has set out a blueprint for the City’s future. The EU has rejected it. Where next?

The Chancellor, Philip Hammond, told an audience in London last week that Britain would reject any free-trade deal with Europe that excluded financial services, arguing that it was not only “possible” but “in our mutual interest” to find an agreement. If that proved elusive, he said, the main beneficiaries wouldn’t be Paris or Frankfurt, but non-European financial centres such as New York and Hong Kong. It didn’t take long for Brussels to pour cold water on his proposals, said Jon Stone in The Independent. Speaking in Dublin the following day, the president of the European Council, Donald Tusk, stated that financial services demand “common rules, common supervision and common enforcement”, which made a bespoke arrangement for Britain impossible. “We should all be clear that, when it comes to financial services, life will be different after Brexit.”

Brussels doesn’t like to admit it, but Hammond’s right, said The Times. Financial services are a crucial industry for the UK – accounting for three quarters of Britain’s total trade surplus in services in 2016. “Yet if the City’s status as a global financial centre is allowed to erode too far, the risks will be felt on both sides of the Channel. The cost of capital could rise for European borrowers, and defences put in place against future financial shocks could be weakened.” Try telling that to the French, who are currently gunning to grab London’s lucrative eurodenominated derivatives market, said Rosamund Urwin in The Sunday Times. Still, given the risks involved in regulating a $1trn market, others aren’t quite so keen. The EU’S remaining 27 states are split “between those that accept London’s supremacy and those that see an opportunity to usurp the City”.

Hammond’s solution is to argue for “mutual recognition” in a trade deal, in which both sides retain sovereignty over their financial services while recognising each other’s regulations. The alternative – “equivalence” – would make the UK a rule-taker, and an uncertain one at that: the EU could withdraw recognition of the rules with just 30 days’ notice. “No large country can afford to leave its financial regulation to outsiders,” said the FT. Hammond was right to insist that Britain could never be a pure rule-taker, but there is more room for manoeuvre in the equivalence model than he implies. For the time being, the EU27 are “opposed to breaking new ground on financial services”, said The Times. But that doesn’t mean they can’t eventually “be persuaded... Nothing is set in stone, and nothing is agreed until everything is.” The Chancellor was “right to set out an ambitious opening bid”, but the real negotiation starts now.