The EU does not need the City of London, and Theresa May’s “pleading” for a special deal for the UK’s financial services sector will not be rewarded, the EU’s chief negotiator, Michel Barnier, has said.
In his toughest rebuff yet to the demands made by the British prime ministerin her landmark Mansion House speech, Barnier suggested the City would be granted nothing more generous than that enjoyed by Wall Street.
“Some argue that the EU desperately needs the City of London, and that access to financing for EU27 business would be hampered – and economic growth undermined – without giving UK operators the same market access as today,” Barnier said at a meeting of finance ministers in Sofia, Bulgaria. “This is not what we hear from market participants, and it is not the analysis that we have made ourselves.”
May had argued in March, in a keynote speech spelling out her vision of a future UK-EU trading relationship, that failing to construct a special deal for the City would hurt economies on both sides.
The City provided more than £1.1tn of cross-border lending to the rest of the EU in 2015 alone.
May conceded in her speech that the current “passporting” regime, under which UK-based financial services would automatically have the right to operate across the EU, would not survive Brexit. However, she went on to suggest that a mutually agreed system would be necessary that would give the UK’s financial services sector greater assurances over future rules than the current “equivalence regime”.
How is financial regulation getting more complicated in the run-up to Brexit?
Banks, insurance companies and other financial firms in the EEA – the EU along with Iceland, Liechtenstein and Norway – are able to do business in the UK with separate regulatory approval. The system is known as passporting and allows firms to trade freely across borders. It applies the other way round, so that UK firms can operate in other EEA countries.
The conundrum facing the Bank of England is that Brexit will change this (unless passporting is replicated in any deal with the remaining 27 members of the EU). This means those firms which currently use passporting to operate in the UK will need to be regulated in the UK by the Bank’s regulation arm, the Prudential Regulation Authority. In the case of banking, Bank of England data show that about 70 banks could be impacted.
But the numbers could be bigger across the entire financial system. There are nine different passports that banks and financial firms use to provide banking services alone.
The Financial Conduct Authority, the City regulator, last year published data showing just over 8,000 companies authorised in other EU states use these rules to do business in the UK while 5,476 UK-registered firms hold at least one passport to do business in another EU or EEA member state. All that will need to be sorted out in the negotiations ahead.
Under the current arrangements, the EU has the unilateral right to change its regulatory demands on services operating outside the bloc, leaving any licences to operate at the whim of Brussels.
Barnier said on Thursday: “I can perfectly see the UK’s logic and interest in pleading for a system of ‘mutual recognition’ and ‘reciprocal regulatory equivalence’. This is, indeed, what the single market achieves.
“‘Everything must change so that everything can stay the same’ – to paraphrase Lampedusa. But this will not work … Why would the equivalence system, which works well for the US industry, not work for the City?”
Barnier pointed out that Brussels was seeking to build on its current equivalence regime to cover more aspects of the financial services sector. He also urged the British government not to seek to undercut the EU by changing its regulatory standards.
“The equivalence system will operate in a more effective manner if the UK decides not to diverge from our financial regulation,” he said. “Let’s not have a short memory: we all saw during the [2008 financial] crisis that the risks of financial instability were ultimately borne by taxpayers – not only in the UK. We saw for instance that remuneration of bankers set the wrong incentives and allowed excessive risk-taking.”
In response, the chief executive of UK Finance, Stephen Jones, said: “We believe a framework based on regulatory alignment and close supervisory cooperation can be developed to deliver the best outcome for both the EU and UK.”
The two negotiating teams started discussing the future relationship last week. EU sources, however, said that the UK side had merely asked questions about the EU’s guidelines on the future relationship rather than offer their own blueprint.
“Sabine Weyand [the deputy chief negotiator] talked it through with them and then they queried why this said that,” the source said. “It is how they acted in the previous phase; they ask questions to stall for time.”