Edit: This article has been edited as the original text contained inaccuracies and factual errors. The report in question was never circulated by the ECR Group, or through the ECR mailing list. Furthermore, inaccuracies about the New Direction organisation and the report itself have been corrected.



The very week London stepped away from its commitment to regulatory alignment north and south of Ireland— New Direction Foundation held a roundtable and circulated a policy proposal on the future of EU-UK financial services. The report mirrored comments by the UK’s Chancellor who called for a financial services agreement based on ‘enhanced equivalence’ as part of a final UK-EU trade deal.

The reports author Barnabas Reynolds, one of the UK’s leading city lawyers, explained aspects of US-EU financial services trade take place on an ‘equivalence’ basis. To put it simply, trade in a number of areas is based on the respective financial sector laws being ‘equivalent’. Such a deal the author argues would bring friction-free access, allow EU partners to benefit from the services and capital markets in London, and the UK to trade freely in the EU market. Reynolds, stressed it would be a win-win arrangement for each. Moreover, the EU would continue its role with the UK as a leading player in shaping the sector’s regulation globally.

The author also sets out detailed proposals for the legal framework for each party, providing both the UK and EU negotiating teams with the draft regulations ready-made. These include the following: a comprehensive draft EU regulation, detailed UK implementation measures and a bilateral UK-EU deal.

The report argues benefits would be mutual: for the EU: EU firms could have friction-free access to the deep pools of capital and diverse services in London, with its international reach and global and domestic customer base. For the UK, UK-located global firms could have friction-free access to clients across the EU and for both, there would be greater predictability and certainty and the opportunity to build on existing business models. Businesses in the EU or London would not have to establish satellites in the EU, nor would EU customers face higher prices to pay for these via higher costs for capital, pensions, insurance, and other investments.

The report reflects on the opinions informing the British government and underscores the legitimate reasons financial services in the UK have to fear a hard, cliff-edge, Brexit in March 2019.

The policy proposal includes a threat, and states if EU negotiators refuse to engage, London could become its own free standing centre, following international law but moving more rapidly to a competitive pro-business regime, with a slimmer rule book ready to attract new businesses from the EU and worldwide. That model, however, would be less good for the EU than enhanced equivalence, which would give EU businesses and customers the stability and continuity of the present free trade arrangements and the advantages of operating in London, but without the costs and complications of restructuring.

The report seems to contradict assurances given by Brexit Secretary David Davies when he noted that the UK would not become a “Mad Max Dystopia” to attract international business.


“We shall never surrender”

Early on, the report makes a parallel between the Brexit UK and Germany after the First World War, calling on Brussels to forget the notion that the UK will sign onto a regulatory “Treaty of Versailles”, in which the UK would be a rule taker. The tone of the report reflects the history of New Direction, which boasts being founded by Margaret Thatcher. As far as British views go, the report echoes Churchill’s “we shall fight on the beaches” speech, using its own mailing list for effective distribution in Brussels.

The report begins with the assumption that Brexit negotiations have moved from the “procedural” to the “substantive.” Indeed, that was the assumption in December 2017, when the European Commission and Theresa May’s government came to an understanding of sufficient progress as regards to the so-called “divorce bill,” Northern Ireland, and citizens’ rights. Both the “divorce bill” and Northern Ireland have now been called into question. In this scheme, the timing of the report may be unfortunate.

But, assuming substantial talks could begin in March, the report suggests that the objective in negotiating market access for financial services is all about “symmetrical” mutual access. The report alludes to a symmetrical relationship, on the grounds that London is a global center that brings depth to Europe’s capital markets. The argument is that if the City lost business, it would not come to Europe, but leave Europe altogether. In addition, the EU should meet in kind the unilateral offer of the UK and remove the need to “subsidiarise” UK based companies. That will be to the benefit of consumers and businesses, it is argued. The author does not discuss the fact that many banks, insurance companies, and even legal consulting offices are already setting up their businesses in the EU.

First of all, the EU has granted no “third party” passporting access to the EU, a fact that the report ignores. Secondly, the UK wants a symmetrical relationship, demanding that the UK should not abide by EU norms to secure access – and will not recognise the authority of the European Securities and Markets Authority (ESMA), the European Banking Authority (EBA), and the European Insurance and Occupational Pensions Authority (EIOPA).


Changing the EU to achieve a bespoke UK deal

The solution proposed is regulatory symmetry:

“The EU would work together with the UK to define high-level regulatory outcomes with which both UK and EU regulation must comply in order not to give rise to systemic risk for each other nor to prejudice each other’s consumer protection agendas.”
In sum, London and Brussels will agree on the effect they are seeking and will each commit to meeting those requirements in their own way. As the report notes, the EU will simply have to “trust” the UK to meet mutually agreed regulatory standards, just as the UK will “trust” the EU. After all, the “intention” is for UK business selling into the EU to observe EU regulation.

That kind of trust has no precedent in portfolio management, securities, clearing, brokering, or trading; but, that is not something the author of the report dwells upon. London does not want passporting rights; the report suggests eliminating the significance of passporting, to allow uninterrupted access to the UK.

Enhanced Equivalence: Simple Political Solutions

The proposed Enhanced Equivalence arrangement would be a bespoke EU Treaty to fit the needs of London, globally unprecedented in the service sector to fit the needs of the UK economy, but swiftly considered and adopted, to allow British Members of the European Parliament to support it. That sounds improbable for anyone who has travelled outside the UK recently.