Analysis
The UK White Paper shows few signs of recognising the reality that it is proposing a “partnership” with an entity that is 6-8 times the size of the UK. This is not a debate between two equals. EU27’s population is 447.4 million so 7.7 times the UK’s 66.5 million. In terms of GDP, the comparison is not quite so unequal: EU27 is €13,519 billion versus the UK’s €2,417 so the EU27 is only 5.6 times the size of the UK economy.
The EU27 has set out its negotiation position in some detail in several sets of Guidelines for its chief negotiator. The latest Guideline was specified on 23 March 2018 after unanimous agreement by the 27 Heads of Government. These can be changed – but only with difficulty. Then there is the need for the assent of the European Parliament to any final deal.
However, the Guidelines were set in response to the EU27’s understanding of the UK’s “red lines” at the time and specifically included the possibility of evolution if the UK evolved. But they explicitly rule out any “cherry picking” and also re-iterated “that the Union will preserve its autonomy as regards its decision-making…” These are just two – amongst many – tests to apply to the UK White Paper to judge the likelihood of its acceptance as a start for negotiations.
Reading through the `financial services sections of the White Paper, one is struck by the complete absence of any detail on how to amend EU legislation to achieve its pious goals. The detailed agreements between EU Members are contained in perhaps 100 Directives and Regulations, most with secondary legislation and then Regulatory and Implementing Technical Standards. In total, they run to many tens of thousands of pages of incredibly detailed prescriptions built up since the Great Financial Crash.
The UK was heavily involved in creating this level pf precise detail in order to prevent the financial sector from misbehaving again on such a colossal scale. The White Paper gives no inkling of how such a vast task can be tackled. Moreover, the timescale would run into many years of Commission consultations, proposals, Council/Parliament debates and then 18-24 months for transposition into national law.
But the key weakness in the White Paper is its naïve assumption that the UK and EU27 are negotiating on a level playing field rather than with a partner 6-8 times one’s size. This naivety is so clearly betrayed by the statement of the possible costs of fragmentation – yet there is no recognition that the scale of Eurozone bank capital makes the cost just 0.02% of capital or just two weeks of profits.
Even if the EU27 had a massive change of heart and agreed to picking of important cherries and to give up its own autonomy to the UK in areas that are crucial for its own financial stability, it would still take perhaps five years before it could all be in force. That portion of the UK’s financial service industry that deals in euro or with EU customers would have long since drowned.
Appendix: Key `financial services’ extracts from the White Paper
48. The UK is proposing new arrangements for services and digital that would provide regulatory flexibility, which is important for the UK’s services-based economy. This means that the UK and the EU will not have current levels of access to each other’s markets.
49 d. a new economic and regulatory arrangement for financial services.
52. The UK proposes…e. best-in-class arrangements on domestic regulation, which ensure that all new regulation is necessary and proportionate.
1.3.4 Financial services
58. The UK and EU financial services markets are highly interconnected:.. For example, one study has found that if new regulatory barriers forced the fragmentation of firms’ balance sheets, the wholesale banking industry would need to find £23-38 billion of extra capital. GPB NOTE: Eurozone banks’ equity capital is about €1,500 billion so this increase would be just 0.02%
60. As the UK leaves the EU and the Single Market, it recognises the need for a new and fair balance of rights and responsibilities. The UK can no longer operate under the EU’s “passporting” regime, as this is intrinsic to the Single Market of which it will no longer be a member.
61. In addition, given the importance of financial services to financial stability, both the UK and the EU will wish to maintain autonomy of decision-making and the ability to legislate for their own interests.
62. The EU has third country equivalence regimes which provide limited access for some of its third country partners to some areas of EU financial services markets. These regimes are not sufficient to deal with a third country whose financial markets are as deeply interconnected with the EU’s as those of the UK are. In particular, the existing regimes do not provide for:
a. institutional dialogue, meaning there is no bilateral mechanism for the EU and the third country to discuss changes to their rules on financial services in order to maximise the chance of maintaining compatible rules, and to minimise the risks of regulatory arbitrage or threats to financial stability;
b. a mediated solution where equivalence is threatened by a divergence of rules or supervisory practices;
63. In this context, the UK proposes a new economic and regulatory arrangement with the EU in financial services. This would maintain the economic benefits of cross-border provision of the most important international financial services traded between the UK and the EU – those that generate the greatest economies of scale and scope – while preserving regulatory and supervisory cooperation, and maintaining financial stability, market integrity and consumer protection.
64. This new economic and regulatory arrangement would be based on the principle of autonomy for each party over decisions regarding access to its market, with a bilateral framework of treaty-based commitments to underpin the operation of the relationship, ensure transparency and stability, and promote cooperation. Such an arrangement would respect the regulatory autonomy of both parties, while ensuring decisions made by either party are implemented in line with agreed processes, and that provision is made for necessary consultation and collaboration between the parties.
66. As the UK and the EU start from a position of identical rules and entwined supervisory frameworks, the UK proposes that there should be reciprocal recognition of equivalence under all existing third country regimes, taking effect at the end of the implementation period. This reflects the reality that all relevant criteria, including continued supervisory cooperation, can readily be satisfied by both the UK and the EU. It would also provide initial confidence in the system to firms and markets.
67. Although future determinations of equivalence would be an autonomous matter for each party, the new arrangement should include provisions through the bilateral arrangement for:a. common principles for the governance of the relationship;
Common principles for the governance of the relationship
68. As established in many existing EU provisions, this approach would be based on an evidence-based judgement of the equivalence of outcomes achieved by the respective regulatory and supervisory regimes. The UK and the EU would set out a shared intention to avoid adopting regulations that produce divergent outcomes in relation to cross-border financial services.
Extensive supervisory cooperation and regulatory dialogue
69. The UK proposes that the UK and the EU would commit to an overall framework that supports extensive collaboration and dialogue. a. Regulatory dialogue: for equivalence to be maintained over the long term, the UK and the EU should be able to understand and comment on each other’s proposals at an early stage through a structured consultative process of dialogue at political and technical level, while respecting the autonomy of each side’s legislative process and decision-making.
b. Supervisory cooperation: in a close economic relationship between the UK and the EU financial services sectors, it would be necessary to ensure close supervisory cooperation in relation to firms which pose a systemic risk and/or that provide significant cross-border services on the basis of equivalence. It will be essential for the UK and the EU to commit to reciprocal and close cooperation to protect consumers, financial stability and market integrity with codified procedures for routine cooperation and for coordination in crisis situations.
© Graham Bishop
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