The UK’s most lucrative services industry will be out of the Single Market and a rule taker on financial regulation after a proposal put forward by British Prime Minister Theresa May on July 12 makes clear the UK expects to have some access to the Single Market but no say in regulation and standards.
A “no deal” for the service industry
The significance of this decision cannot be overstated. Around £1.4 trillion (€1.69 trillion) of assets are managed in the UK on behalf of EU-based clients.
This will mean that Britain financial services will not be able to hold onto their current “passporting rights” that allowing them to cater to clients across the EU. The idea for the financial services sector is to move towards mutual recognition of financial standards – so-called “equivalence” – that will allow access to the extent that the EU recognises that similar standards are in place on certain products and services.
The City of London Corporation chair, Catherine McGuiness, described the UK’s policy as “a real blow” to the service sector. The City wanted the UK to retain a seat at the table of European financial regulation, while the Lloyd’s of London chief, Inga Beale, warned that the insurance sector is seeing this as a nod to set up subsidiaries in Brussels.
The City goes from leadership to marginalization
Politically, the UK cannot hold on to its regulatory leadership of the financial sector as there will no longer be a UK European Commissioner and with the European Banking Authority moving to Paris, there will be no access to the Single Market.
For over a year, the City was preparing for a “mutual recognition” regime that would resemble passporting rights that extend the two-way market access, meaning the UK would not be a regulatory leader but would play a decisive role.
EU officials, however, have opposed the idea and the May’s White Paper recognises that this will not change. Brussels is adamant that EU-only bodies are allowed to regulate access to the Single Market. The City was hoping for a deal that would make any bilateral arrangement more “dependable” for long-term investors.
May’s White Paper does not give up on this objective, but it is less ambitious than what the market expected.
EU financial services chief Valdis Dombrovskis said on July 12 that he would support the prospect of an “enhanced equivalence” system, a term echoed by the finance minister of Luxembourg, Pierre Gramegna. German finance minister Olaf Scholz has made it clear, however, that the EU will not be consulting with “outsiders” before setting its own financial regulation.
Politically, the UK government is finally recognising that with the forthcoming European elections and the anticipation of a new European Commission, the UK cannot hope to negotiate a better deal before the end of the transition period in 2020.
There are now two possible reactions for the financial service sector.
The first is to set up subsidiaries in the EU – an ongoing process – so as to retain access. Pressure from the EU will mount to move a bigger share of the service sector cluster, making the argument that the EU needs to control risk generating activity.
The second reaction for the UK would be to move towards financial deregulation or a “race to the bottom” that is highly unwelcome in Brussels and could ultimately widen the gap with London.