Brexit financial services talks result in rare consensus

By Alex Barker in Brussels

Britain’s membership of the EU was often characterised by feuding over the City of London. But a remarkable feature about the country’s exit negotiations has been the lack of big battles over financial services — a sector of outsized economic importance to the UK.

While Brexit negotiators are still struggling to overcome differences over customs, goods trade and Northern Ireland, financial services issues are all but settled, according to EU diplomats.

With little fuss, negotiators have worked up a short draft text that would go into a declaration on future relations, which outlines parameters for a post-Brexit trade negotiation.

One of the big potential flashpoints of Brexit talks has as a result become an area of relative consensus — at least for the time being.

“This has gone from being one of the most feared paragraphs [of the declaration] to something that is no longer so daunting to do,” said one EU diplomat handling Brexit.

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The financial sector is the UK’s biggest source of exports and tax revenue. But the outbreak of harmony is the result of Britain’s prime minister scaling back her ambitions.

To the dismay of City figures who had sought deeper relations, Theresa May’s Chequers plan brought the EU and UK’s negotiating positions closer together by paring back expectations for a future free trade agreement.

Both sides are now aiming for a more arm’s-length relationship, with cross-border trade in financial services managed through so-called “equivalence” decisions, taken independently by each side.

Such equivalence arrangements make it easier for non-EU institutions to do business in Europe in specific areas, as long as their home countries are deemed by the European Commission to have similar standards of oversight.

The emerging consensus on financial services is also helped by the nature of the text under discussion. The declaration on future relations is a political statement of intent running to a few dozen pages in total. It marks the start of a long negotiation, which could run beyond the end of Britain’s transition in December 2020, rather than a finale in which big concessions are made.

One EU official joked that financial services proved “easy” in the declaration because “there was nothing to negotiate”.

The text is expected to outline common ambitions for the talks on regulatory ambition and the right of establishment for companies — standard elements of EU free trade deals when it comes to financial services. Unspecific commitments to work on systems for equivalence could also be included.

This approach would place no obligations on the bloc to change either existing EU law, or its approach to managing financial services from non-EU countries.

Valdis Dombrovskis, the European Commission vice-president overseeing financial services, had said the EU was “ready to have close regulatory dialogue with the UK”. But he made clear that such talks would be “in full respect of autonomy for both parties”.

This is very different from the UK’s opening expectations. Backed by the City’s biggest institutions, Britain had previously sought to replicate its current levels of market access through a system of mutual recognition, enshrined by treaty.

Under a mutual recognition model, both sides would have set rules independently but access rights would have been guaranteed as long as the regimes were recognised as achieving the same outcomes. An independent arbitration system would have managed disputes over rule changes.

But when faced with outright rejection from the EU side, the UK side recast its position to prioritise regulatory independence.

Mrs May recognised the limitations that placed on EU market access in a highly regulated sector. Her government now accepts that access will not be determined in broad terms by treaty agreements, but by unilateral “equivalence” decisions by both sides in specific areas.

Nevertheless, Britain has sought assurances about the mechanics of these equivalence decisions.

London sees the EU’s existing equivalence system as patchy and unpredictable, since many sectors are not covered — including commercial banking, primary insurance, securities trading and corporate lending — and permission can be withdrawn with as little as 30 days’ notice.

As a result, the UK wants equivalence granted automatically in areas presently covered by EU law once Britain’s transition ends, and a guarantee that assessments are conducted in areas not currently covered by the EU’s existing equivalence regime.

Such detailed pledges are not included in the framework on future relations, according to EU diplomats.

At best they would only be tackled at a late phase of trade negotiations. Michel Barnier, the EU’s chief negotiator, is strongly opposed to negotiating with Britain on policies that are an internal EU matter — such as the single market.

The EU is independently looking at revamping its system to handle the fact that the City, Europe’s biggest financial centre, will be outside the single market.

The “enhanced” equivalence regime under discussion could potentially expand areas where market access can be unilaterally granted. But France is leading a push to toughening up conditions for equivalence, potentially requiring joint regulatory oversight.

Philip Hammond, the UK chancellor, warned this summer that such reforms to “enhance” equivalence may have “nothing to do with equivalence . . . and everything to do with an ambition to force the location of business into the EU”.

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Alex Barker 2018 “Brexit financial
services talks result in rare consensus  ” Financial Times 5th
November. Used under licence from the Financial Times.

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