19 September 2017

The Brexit gridlock: No ‘significant progress’ to move on to trade talks soon - 133rd Brussels for Breakfast

The British’ ambition to reach an early deal on cross-border trade after Brexit has met a wall in Brussels: European negotiators won’t unblock talks over trade before Britain secures EU citizens’ rights and Northern Ireland status, and agrees to foot a bill.

Paula Martín/Graham Bishop

Organised by the Centre for the Study of Financial Innovation (CSFI) with co-presenter Brian Polk (PWC)

Highlights from the “Brussels for Breakfast” meeting

Transition dominated – from holiday back to work at the trivial level, but the nature of the Brexit transition was really the key topic. The UK Cabinet – or at least most of it – seems to have coalesced around the notion of a transition period lasting perhaps 2-3 years. However, most people who use the term seem to have a different concept in mind. So I began the meeting by quoting para 19 of the EU’s Brexit negotiating directives. The key sentence is “Should a time-limited prolongation of Union acquis be considered, this would require existing Union regulatory, budgetary, supervisory, judiciary and enforcement instruments and structures to apply.”

There is no mention of cherries to be picked, or bespoke arrangements, or EEA Lite, or any other new-fangled system. The EU’s concept seems to be “just stay exactly as you are” – but no voting rights – and continue paying! Given Foreign Secretary Johnson’s re-statement of his commitment to getting “£350m per week” back, the scene may now be set for a major rupture – within the UK Government and with the EU negotiating process. A finding by the EU 27 of `insufficient progress’ may turn out to be the last straw for many banks teetering on the brink of deciding that they must follow the SSM recommendation of prepare in detail for a Hard Brexit. Given the scale of the legal/contractual uncertainties that would be thrown up, location decisions are now imminent.

But investment firms – both buy and sell side – already have a full agenda with MiFID II, only three months away from coming into force. Many buy-side firms still seem unprepared for “best execution rules” while a surprising number of high profile investors are changing their mind about research – deciding to pay for it themselves. The new requirement that firms be able to demonstrate that their client-facing staff dealing with securities should be “knowledgeable and competent” – and continue to be so – has created surprisingly few ripples so far.

However, the biggest impact on asset managers may turn out to be ESMA proposals that limit firms’ ability to delegate key functions outside the EU. The ghost of Brexit is everywhere around the City!

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