22 January 2018

Financial Times: On the City of London and Brexit, silence is not golden

The UK government, it appears, does not plan to make explicit its goals for the financial services industry after Brexit. A position paper on the topic, promised to the industry in the autumn, has been put off indefinitely. The City of London has expressed dismay. Bankers, traders, asset managers and insurers need clarity about what the rules will be after Brexit once the transition period is over. [...]

Immediately after the Brexit vote there were hopes that City institutions could “passport” into the European Economic Area, as they do now. But this would require EEA membership — and as such a Norway-style Brexit in which the UK becomes a pure rule-taker. “Norway minus”, giving the UK greater control over immigration, would be desirable. Excluding such control, the Norway option is probably a political impossibility for the UK. But giving way on freedom of movement is likely to be a bridge too far for the EU.

Establishing capitalised subsidiaries in the EU would be an expensive and inefficient solution that put City institutions at the mercy of local European regulators. The final option is a form of “equivalence,” where both sides recognise the regulatory regimes of the others as sufficient, and hammer out disputes though multinational bodies, such as the existing college of supervisors. Equivalence holds, for example, for the US on derivative clearing houses.

Why would the EU give up any measure or regulatory control over finance? Because European industry has an interest in a unified, deep, and liquid market for products from interest rate derivatives to corporate loans. This exists only in London now. European politicians may think this can be reproduced elsewhere, but that would take many years and might not work even then. It is up to the UK government negotiators to make this point clear, while demonstrating willingness to give way in some areas in goods trade in return for equivalence for its highest-priority financial sectors, such as asset management and euro-based derivatives clearing.

Equivalence requires that UK regulations remain broadly in line with EU rules, even if it does make way for specific divergences on, for example, bonus caps. There will be no Singapore-on-Thames. Flexibility on payments to the EU may also be required. The UK has indicated willingness to make reasonable contributions to remain within the regulatory regimes governing aviation, nuclear power, and medicine. It should be ready to do so in the case of finance, one of its defining industries. [...]

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