Theresa May’s Brexit plan leaves bankers in the dark

Theresa May’s government has presented its eagerly awaited proposal on the future relationship between Britain and the EU after Brexit. One area that merits careful scrutiny concerns the City
of London and financial services, given their weight on the country’s economy and central position in global markets.
After the Chequers agreement, it became clear that the UK would want to retain a “common rulebook” with the EU on goods, but not services. What this meant in practice remained anyone’s guess. The white paper, unfortunately, does little to spell out a relationship that would be acceptable to both Britain and Europe. May and her finance minister Philip Hammond are trying to walk a fine line between having a great deal of autonomy in regulating the UK’s financial services and maximising market access within the EU. For all their hopes, it’s still hard to see how this ends up without Britain becoming an EU “rule-taker” on services, as it will be on goods. Unless the UK resigns itself to this unpalatable fact, the fear of a no-deal Brexit remains.
The UK and Brussels have had to retreat already from three different ideas for the post-Brexit City. The first was passporting, a legal mechan-ism that lets financial firms based in one EU country to do business in all other member states. Yet this would require staying in the single market, something that May’s government isn’t prepared to do.
The second suggestion, put forward by the EU, was ”equivalence” — where two markets facilitate cross-border trading by recognising each other’s standards. This would allow UK entities to operate in the EU without having to stay in the single market. The problem, which has made the Bank of England skeptical, is that the EU could force Britain to implement rules it doesn’t like. Equivalence could also be withdrawn at short notice, making it a fragile arrangement.
The third idea was “mutual recognition,” which would let the UK and the EU draw up their own rules, while accepting those governing the other market. The British government and regulators were very keen on this until Michel Barnier, the chief EU negotiator, poured cold water over it. That’s because it would grant Britain exceptional autonomy, something EU member states don’t have, while giving it substantial market access.
The white paper is simply a variation on this third scheme. It offers some justification for why the UK should have substantial autonomy, including the need for British regulators to impose tougher standards given the City’s worldwide prominence. This is a questionable argument. Why wouldn’t EU regulators be equally capable of understanding the City’s
importance to global market stability? The document does try to show how the financial services relationship with the EU would evolve. The government wants a system of dialogue between regulators to agree rules, and mediation to paper over differences. But it’s hard to see this working in practice. The UK clearly wants to diverge from the rest of the EU; otherwise it wouldn’t be treating services so differently from goods. The EU will rightly fear that this will hand London too much of an advantage.
The UK does, of course, have some bargaining chips. The EU has plenty to gain from keeping a close trading relationship with the City. European companies are served well by London’s extraordinary financial ecosystem when raising equity, borrowing or buying in expertise.
—Bloomberg