March 26th newspaper headlines announced the signing of a UK-EU post-Brexit agreement for financial services ahead of the specified March 31st deadline. Three months after the UK’s tense departure from the union, amidst the frustration of a no-deal Brexit for financial services, is this positive news for the industry and what does it mean for the UK’s standing as a global financial centre?
The Trade and Cooperation Agreement (TCA) the UK and EU implemented with effect from 1st January this year did little to facilitate access to the EU’s single market for UK financial services. In a 1,200+ page document, ‘financial services’, which in 2019 added £132bn (7% of total GDP) to the UK economy, appears six times. ‘Fish’ appears sixteen.
The news stories implied the March deal signalled a big leap forward. In fact, the declaration showed only the parties’ willingness to negotiate; it’s an agreement to agree details at a later stage. They pledged to continue dialogue aimed at signing a Memorandum of Understanding (MoU) to create a framework for “regulatory cooperation in financial services between the UK and the EU”. HM Treasury admitted “formal steps” need to be taken before this can happen, but it expects developments to occur “expeditiously”.
Up until 31st December last year, UK firms enjoyed passporting rights allowing them to sell their services into the EU from a UK base without needing additional regulatory clearances. Without passporting, separate, unilateral agreements are necessary forcing firms to overcome a tangle of individual EU nations’ regulations. A year ago, the UK was asking for permanent and comprehensive equivalence in place of passporting rights post-Brexit. This would allow businesses to offer certain financial services in the EU on the basis the union recognises their base country’s regulatory framework as equivalent to its own standards. Far from achieving this, the recent agreement omitted any bilateral mechanism to grant equivalence; that authority remains entirely with the EU. There’s no clarity about the nature of the discussions and whether they’ll affect the EU’s regulatory framework. Currently, out of 39 potential equivalence agreements under EU law, the UK has only two compared with Australia, Canada and the US which have 19, 20 and 23 respectively. In comparison, the UK has granted the EU 17.
Is equivalence therefore the answer for UK financial services and how achievable is it in the current environment? According to Sarah Hall, professor of economic geography at the University of Nottingham, “The relationship is more one of competition than cooperation at the moment” and the risk is that the delay in achieving regulatory uniformity will drive European financial activity to non-European centres, such as New York.
Lord Hill, former EU Commissioner for financial services and Leader of the House of Lords, believes it’s time to stop looking to Europe and start focusing on building a sharper, outward-looking City of London, one in which its regulatory future is “more nimble, competitive, dynamic”.
The Commission recently granted equivalence to US Central Clearing Counterparties (CCPs) and allowed them to operate throughout the union. This move could indicate it will try to exert more pressure on UK and EU firms to relocate and develop a local capacity for clearing inside the EU, instead of relying on clearing in London. In a recent Mansion House speech, Andrew Bailey, Governor of the Bank of England, made clear that this is not the time for regional arguments. The greatest benefits will come from “an open financial system that respects the public interest objective of financial stability… It needs to be supported by effective institutions and strong international standards. But this must be a global, not a regional, regime to be effective.”
On this basis, perhaps the UK’s financial services industry should not be putting its money on equivalence as the answer. As the country emerges from Covid, the pre-eminence in finance London enjoys is vital for our recovery. Rather than being concerned with coordinating and agreeing with 27 EU countries to achieve parity, London should maintain and enhance its standards and regulatory oversight so firms globally have confidence in it as a place to do business. Apostolos Thomadakis, researcher at the European Capital Markets Institute, believes focusing outwards and concentrating on the UK as a non-EU, global financial centre will allow it to expand into emerging areas such as fintech and tech investment as well as green finance. “For example, by developing and regulating new financial products that will allow investors to positively engage with climate-change finance and cryptocurrencies.”