The EU is playing a high-risk game of chicken
We’ve all seen the “no-deal” Brexit cartoons. A good, old British Mini, emblazoned with Union Jacks, loaded up with gung-ho politicians, drives cheerfully and determinedly off a cliff. But the abiding feeling I have after reading the Financial Conduct Authority’s Brexit paper published last week, is that there is an element missing. Attached behind the Mini, there ought to be a trailer loaded up with EU treasures: personal data, regulators, enforcement against market abuse, and so on. Strangely, this part is always missing.
The FCA paper assesses what will happen under various scenarios – no deal, no deal with a transition and the Government’s deal. As it states, if we leave in March without a deal, then 359,953 regulatory “passports” used by 13,484 firms to conduct their business across borders suddenly become invalid, potentially throwing huge volumes of trade into chaos. But what’s striking is how most of the risks in this scenario result from the EU’s refusal to take any action – and how severely this stubbornness could backfire on Europe’s own citizens.
Over and over, the FCA stresses that it is doing what it can. It has set up a “temporary permissions regime”, so that all business that currently relies on EU permissions will still be considered valid from the UK side even if those permissions suddenly cease. It has helped the Government to draft 60 statutory instruments outlining powers needed to smooth a fast UK transition out of the EU (if only Parliament will pass the legislation). It has made it clear that UK firms will still be allowed to share data with EU entities. It has introduced a mechanism for EU firms to restructure their cross-border business in a way that maintains legal continuity for contracts. And so on. Taken together, these actions provide some degree of protection for companies and customers in the UK. Contract continuity measures, for example, will help 16m British users of European insurance products to be sure they can keep paying their premiums and receiving payouts. The granting of temporary permissions means that UK customers or counterparts know they won’t get in trouble for continuing to access the services of the 8,008 EU firms that use passporting to operate in Britain. The regulator’s stated commitment to keeping trade flowing provides some reassurance that London will continue to be a major centre of liquidity and a competitive marketplace for customers.
Yet there is an obvious caveat. The Treasury, FCA and Bank of England are only half of the equation. If the EU refuses to play ball, there is a limit to what the UK can do on its own. Cross-border contracts need permission to operate on both sides of the border. Unfortunately, the document states: “As a result of insufficient action on the EU side, there may be some disruption.”
“Some disruption”: this little phrase covers a multitude of sins. It covers the fact that 38m European customers of British-based insurance firms have no guarantee their policies will still operate. It covers the risk that any EU business using an interest-rate swap to hedge risks (of which there are millions) might suddenly find this instrument unavailable because 90pc of them are cleared in London. It covers the sudden invalidity, after March 2019, of £18 trillion worth of uncleared derivatives contracts supplied by UK firms to EU customers. And it covers the little point that EU regulators could be unable to monitor market abuse or enforce transparency thresholds under its precious “Mifid II” regulation, because doing both relies on receiving 21m transaction reports per day from the FCA.
As the FCA notes, the EU’s decision not to cooperate “will limit the ability of EU clients and banks, as well as UK banks, to manage risks particularly in situation of market stress”. It would be easy to mitigate: “Many of the effects of a no-deal scenario could be managed if the EU and UK were able to find each other equivalent ahead of exit.”
So given the risks to its financial system, why isn’t the EU playing ball? Well, we know the reason. They are playing a dangerous game of chicken. Any time there is a risk to an EU market, it poses a risk to the UK too. Brussels is using these risks as one of the levers by which to persuade us to vote through Theresa May’s deal.
Fine. We have known – or should have known – this was the game being played from the beginning. And as I’ve written recently, I believe, on balance, that there are compelling reasons to vote for May’s deal. It is better than any available alternative, especially as it removes us from the EU’s regulatory system. As the FCA’s document states, being subject to EU rules without any way to influence them is a long-term risk that the UK should not take. There are already 30 new European financial regulations in the works, 27 of which would directly affect us if applied during the transition (thankfully, this is unlikely, due to the tortuously long time it takes Brussels to pass new legislation). The withdrawal deal, for all its flaws, ensures this won’t happen for decades into the future, whereas voting it down means that anything can happen.
But let’s not forget the other side of the coin. EU consumers and businesses are also facing enormous risks from what happens in Westminster over the next two weeks and it is within the power of European bodies to mitigate these risks. They are not doing so for purely political reasons. If and when a chaotic no-deal Brexit comes to pass, Europe’s citizens will have every right to ask why more wasn’t done to protect them. I am not sure they will find Brussels’ answer – that it wanted to scare us – very convincing.
‘Brussels is using these risks as one of the levers by which to persuade us to vote through Theresa May’s deal’
Anti-Brexit protesters wave European flags in front of Parliament in central London yesterday