Dan­ger­ous gam­ble

The EU is play­ing a high-risk game of chicken

The Daily Telegraph - Business - - Front Page - Juliet Sa­muel

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

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