11 February 2020

159th Brussels for Breakfast – The EU-UK trade deal: if - when - what

Organised by the Centre for the Study of Financial Innovation (CSFI), hosted by CISI with fellow speakers David Henig (ECIPE) Sam Lowe (Centre for European Reform). This blog complements the subsequent 50th Brussels 4 Brunch 30-minute CISI webinar that is also available to Friends of GrahamBishop.

What will be in the trade deal with EU? When will it happen? Will it even happen at all? Lots of questions but no definitive answers at this stage!

The EU has set out its starting point in a 45-page document that contains the draft negotiating mandate to the Commission as sole negotiator. Though still open for some changes – generally thought only to be tougher – the plan is to sign it formally on 25 February, ready for formal negotiations to start in March. It contains just two paragraphs on financial services, versus six about fishing! It also seems to give Spain a veto about Gibraltar. It talks of respecting regulatory and decision-making autonomy, retains the “prudential carve-out” found in all EU “trade deals” and states the key policy instrument to be “unilateral equivalence frameworks”. Yes, there should be close, voluntary regulatory cooperation – but preserving the Union’s autonomy. So far, so bad for UK-based financial services.

What is the UK’s corresponding negotiating mandate? Amidst the Prime Minister’s lofty, historic rhetoric in his Greenwich speech, there seems to be no mention of financial services. However, within the fine phrases, there seems to be quite an amount of wiggle room. But absolutely no detail though the Chancellor did provide some sign-posts today: “comprehensive, permanent equivalence decisions”.

The expectation is that serious negotiations will only begin in 3Q once the deadline for an extension of the implementation phase has passed. Then the deadline of ratification by year-end will loom very large. Is there time to do a “single package” which includes all the “level playing field” guarantees, etc. – as the EU wants? Can the deal be cunningly constructed so that it avoids being classified as a “mixed deal” that requires national (and sub-national) Parliamentary ratification?

The chances of “a” deal may be above 50% but what will be in it? The EU has the huge advantage of being in continuous negotiation with countries around the world, so it already has a 1000+-page template on the shelf. The most recent is the EU-Japan deal. So it is relatively easy for the EU to insert UK instead of Japan and offer this as a deal – with a few tweaks. The UK has no such model to hand. It may turn out to be substantially dis-advantaged that it has now `left the EU’ so has no seat at any table.

Another problem is that the EU is not standing still – certainly in financial services. Technology is marching onwards and was one of the main drivers for the huge changes from MiFID I to MiFID II. Some tweaks to MiFID II will be discussed soon but then comes the full review. The UK will have no influence on this – but will still have to swallow it wholesale if it wants to remain “equivalent”.

There was a bit of time left for a few other topics, so we focussed on bank stress tests as the 2020 edition is just getting underway. The starting point is that the ECB/SSM is keeping its SREP requirements unchanged but wants banks to publish the requirements. It identifies some points of “notable deterioration”: “most” significant banks earnings are below their cost of capital and a `significant’ number of management bodies are `not effective’. The EBA is now consulting on revising the stress tests structure to allow a second, parallel strand where banks will model their own response to difficulties. Will it show the perhaps-inevitable response to demands for higher capital ratios: a shrinkage of balance sheets and thus credit to the economy? Difficult balances to be struck in the next few years!

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© Graham Bishop