13 April 2018

Fed Trust: EU Capital Market Union positions to deliver financial services post-Brexit

[...] Clearly, the absence of services coverage in the EU’s draft guidelines means there could be a lot at stake for the City of London, and the UK as a whole, should trade in services not be included within an FTA.  The scale of importance of financial services for the UK economy can be evidenced from the most complete data available in 2016, when the nation’s services exports to the EU topped £100bn. London’s share of the total was £47 billion, including about £37bn in financial and banking services, and roughly £10bn in legal, accounting and other professional services.

Given the economic benefits at least several of the remaining EU states may derive from developing financial services for the single market, in the wake of Britain’s possible exclusion in this sector, it’s hardly surprising that only a day after the EU’s draft guidelines were released, the European Commission announced, on March 8th, a raft of new measures designed to complete an EU Capital Markets Union (CMU) by mid-2019. [...] 

Preparing for Brexit

The European Commission’s communication on March 8th stated that the departure of the UK from the single market reinforces the urgent need to further strengthen and integrate the EU capital market framework, including on central counterparties, investment firms and markets for initial public offerings.  It also reiterated the need for further integration of financial services supervision at the EU level.

The respective measures to be put into place in achieving these objectives will “constitute the basis for a decisive and lasting laying of foundations for a true CMU by 2019”, according to the Commission.  These include its commitments in setting up eight CMU building blocks by mid-2019.  While three have already been enacted by the European Parliament and European Council, the others have yet to be adopted, including those announced on March 8th.  These included promotion of covered bonds as long term finance arrangements, boosting the cross border distribution of investment funds, facilitating the financing of sustainable economic growth, and enabling crowd funding service providers to establish a more competitive and innovative European financial sector.

The Commission’s positive message of embedding a level playing field for EU-based financial services, through CMU, was in stark contrast to a joint report issued on April 12th, from the EU’s banking, insurance and market regulators on the risks of Brexit to the bloc’s financial system.  This stated that Brexit may affect the access of EU companies and households to financial services supplied out of the UK.  “Contingency planning should consider timely responses to all potential challenges, such as contract continuity and possible relocations”, it said.

The report further added that UK-based banks, insurers, market infrastructure entities and asset managers should push ahead with applications for licenses, to set up in the EU, in advance of next year’s Brexit deadline.  This way, such organisations would avoid their customers being cut off from financial services outside the single market. [...]

What the future may hold

CMU poses a long-term competitive challenge to the UK’s financial services sector in the EU single market, post Brexit, notwithstanding the likely difficulties the UK faces in upcoming FTA negotiations to include trade in financial and other services.

This is not to say that the Commission will not experience resistance from the EU’s Council and Parliament in its ambitions to complete CMU by mid-2019.  Over the last few years, these co-legislative bodies’ deliberations over the Commission’s proposed CMU building blocks have often been deadlocked, and without any clear road ahead in some cases.

Conversely, of course, the rich spoils to be won from Brexit, for several EU states looking to beef up their financial services offerings, may be the galvanising tonic the Commission had long been hoping for in securing successful passage of CMU.

Full analysis on The Federal Trust

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