One of the most important, and most controversial, elements of the forthcoming Brexit negotiations will be that covering financial services. The UK’s financial services industry is critical not just to the British economy – where it represents for over a tenth of the country’s economic output, and generates £66bn in tax revenues – but also to the wider European economy. The UK accounts for almost two thirds of Europe’s capital markets business, and UK-based banks provide more than £1.1 trillion of loans to the EU, financing businesses and households across the continent.
The stakes are high. A poor deal for financial services at the end of the UK-EU negotiations would not just be bad news for a few highly paid individuals in the City of London. It would mean millions of European people would be worse off, because companies would find it harder to secure the money they need to grow and to provide the high quality, decently paid jobs that all progressives want to see.
There is a way to strike a fair, balanced and progressive deal for financial services that benefits the UK, the remaining 27 countries of the EU, the financial sector itself, and citizens and consumers across Europe. It involves both sides entering into talks in an open, constructive manner and realising that the negotiations need not be a ‘zero sum’ game in which one side can only benefit at the expense of the other. It also involves the financial services industry acknowledging their consistently low levels of public trust in the wake of the financial crisis, and therefore committing to uphold high regulatory standards and regain some of that trust in the course of the Brexit negotiations.
This ‘new deal for financial services’ starts from the assumption that, after Brexit, the UK will no longer be a member of the single market. If that is the case, then for the purposes of financial services legislation the UK will be considered a ‘third country’, the label currently applied to countries like the US, Canada and Australia. Unlike those countries, though, the UK will have been a full member of the EU and wholly compliant with EU financial services legislation up until the point of departure. This therefore argues for a bespoke arrangement for the UK, in order to maintain the strong links between the UK and the EU and not to fragment Europe’s capital markets at a time when growth across the continent is far from secure.
A new deal for financial services which benefits both the UK and the EU27, and which would encourage economic growth at the same time as promoting financial stability and consumer protection, would comprise three elements:
- Automatic equivalence for the UK: Several pieces of financial services legislation already include arrangements whereby a third country whose regulatory regime is deemed to be ‘equivalent’ to that of the EU is permitted access to EU markets. As the UK will have been compliant with the whole body of EU law right up until it leaves the EU, it should be considered ‘equivalent’ from the very first day after Brexit. But the conditional nature of this equivalence should be very clear: equivalence only lasts as long as the UK maintains the EU’s high regulatory standards. Deregulate, and equivalence is lost.
- New equivalence arrangements where possible: The EU equivalence regime does not currently cover all elements of financial services legislation. In some areas this is justified (where it would be inappropriate to allow third countries access to the EU’s internal market) but there are other areas which would benefit from being opened up to equivalence. The Brexit negotiations would be a sensible time to look at the equivalence regime as a whole and consider other areas where it would benefit both the UK and the EU for increased cross-border access to be permitted
- A new EU-UK financial markets regulatory dialogue: Arrangements also need to be made for handling future developments. The financial services sector is fast moving, and both the UK and the EU will need to respond to changes with legislative or regulatory action. Given the significant levels of interconnection between the two jurisdictions, this should be done as part of a coordinated process. Technical experts from both sides should cooperate on new regulation, their work underpinned by a simple principle: the closer the UK and EU27 regulatory landscape, the greater the degree of cross-border access – and vice versa.
The detail will need to be fleshed out, but in principle these three elements of a new deal would allow a win-win situation in which cross-border access between the UK and the EU27 continues, high regulatory standards are upheld on both sides of the channel, and businesses and consumers alike can benefit. In order to achieve it, the UK and EU27 negotiators will need to eschew petty politics for a view of the bigger picture, and those in the financial industry will need to accept that they have nothing to gain from pursuing a “divide and rule” strategy in which they play one jurisdiction off against the other in the hope of creating opportunities for regulatory arbitrage.
A good deal is possible. All sides have to want it, and have to be prepared to work for it. As the negotiations begin in earnest, we would urge them to do just that.