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Anyone who thinks that it will be easy for the EU to grant the UK a bespoke deal on financial services needs to understand what the EU27 thinks is at stake. After all, the Great Financial Crash had its European headquarters in the City of London and has resulted in a re-structuring of the EU’s economic governance rules to give a hugely enhanced role for Eurozone bodies such as the Eurogroup. The crisis forced the whole thrust of financial regulation within the EU to move on from “mutual recognition” – pioneered by UK Commissioner Lord Cockfield in the 1990s – to a single Eurozone regulator such as the Single Supervisory Mechanism for the banking system.
However, the UK Government has now revived the concept of mutual recognition especially for financial services. As Brexit Secretary Davis put it: each side would "trust each other’s regulations and the institutions that enforce them.” This may work on the day of Brexit but the Prime Minister raised the issue pointedly in her Florence speech – what happens when we want to diverge? The EU believes it has answered this question explicitly in its published negotiating guidelines “The European Council further re-iterates that the Union will preserve its autonomy as regards decision –making” – meaning the EU27 will decide for itself what it wants to do. This is hardly surprising for a group that is about seven times the size of the UK.
When the UK chooses to diverge from EU regulations, it is a reasonable presumption that the EU will no longer “trust” the new UK rules. Both sides will only change their rules when there is some event that requires it. If the other side does not follow, then there would be a divergence from what is deemed necessary – automatically killing mutual recognition, making it an ineffective strategy to secure the long-term future of the City as the EU’s financial centre. [...]
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