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Organised by the Centre for the Study of Financial Innovation (CSFI), with Graham Bishop and Nicolas Veron (Bruegel/Brussels and Petersen Institute/Washington).
Note: As the meeting began, we were receiving reports about a bomb explosion in Brussels but the full magnitude of the horror was not evident until after the meeting. Our collective hearts go out to all those affected, and may yet hear of friends effected - especially given the attack on the Maalbeek metro station which so many of us use frequently.
The previous B4B meeting took place as the fateful (and marathon) Brexit Summit meeting in February was about to start so it was inevitable that the major topic yesterday was unpacking the implications for financial services directly, but the Brexit referendum more generally.
Discussion focussed on the practical implications of `the deal’ rather than its details – starting with the formal statement link made by the Prime Minister afterwards to the House of Commons. “…be clear that it is a final decision ... and no Government can ignore that…”; “if the British people vote to leave, there is only one way to bring that about…trigger Article 50…and the British people would rightly expect that to start straight away…it triggers a two-year time period to negotiate the arrangements for exit. At the end of this period, if no agreement is in place, then exit is automatic unless every one of the 27 other EU member states agrees to a delay. We should also be clear about what would happen if that deal to leave was not done within two years. Our current access to the single market would cease immediately… our current trade agreements with 53 countries around the world would lapse.”
We covered the two formal reports from the Government: “Alternatives to Membership” link and “The process for withdrawing from the EU” link. Both these reports should make sobering reading for those who claim `leaving’ will be a quick and simple process as the Government argued that the process would lead to “up to a decade or more of uncertainty”.
In particular, the implications for financial regulations look dire: Directives have all been transposed into UK law so would not be effected. However, Regulations are very different as they take direct effect and are not built into English law. EMIR, CRR, MAR etc would simply cease to have any legal force in the UK and the operating details of the single market in finance would vanish at the instant of our departure. Down the chain, the legal foundation for acts by the Bank of England based on these Regulations would also lapse. Fellow-speaker Veron pointed out the absurdity of the first act of the UK Parliament after a Brexit vote being to vote an omnibus measure giving continued legal force to all detailed EU law. In any case, a Parliamentarian pointed out that such an omnibus measure would be subject to huge numbers of amendments and would not be enacted quickly.
Even the sceptics now seemed to recognise the sheer scale of the uncertainties. It was proposed to negotiate the necessary 53 new trade deals based on the existing texts… but there is no logical reason why the partner on the other side would agree to a deal with 65m UK citizens that they gave to 500m EU citizens – the world’s largest trading power by far. The sceptic response seemed to be that the betting odds are right: there is little chance of the UK voting to leave as the odds are 2:1 to stay. (Historians may raise the obvious question of why then put the question to a vote - with all the actual and potential risks to the UK’s positon in the world?)
The Canadian “Free Trade” Deal (CETA)
Leading `Leave’ proponents such as London Mayor Johnson have advocated that the recent Canada /EU Trade deal (CETA) could be an alternative path for the UK – though he appeared to resile from that before the Treasury Select committee today. The Open Europe report on the Brexit implications of CETA link underlined the problems it would pose for the City as restrictions remain on financial services so Canadian firms need a presence within the EU. [Note: the original ideas for a broad framework – including financial services - started in 2004. Negotiations on the current concept started in 2009 and were completed in 2014. Further revisions were agreed by February 2016 and the Treaty will now have to be ratified by all EU Members States, with some possibly requiring a referendum. CETA may take 14 years from initial thoughts to ratification and implementation.]
The US/EU Financial Dialogue
Attention moved to the US-EU Financial Markets Regulatory Dialogue Joint Statement link. This was initiated 14 years ago and “both sides continue to identify areas for further engagement”. The vexed question of CCP equivalence for OTC derivatives finally seems close to resolution. The tenor of the EU/US discussions seemed to be epitomised by the comments on audit: “participants took note of ongoing efforts to more clearly define approaches to co-operation, including the prospect of further degrees of reliance in the future to the extend justified.”
This language expresses the urgency of relations between two trade blocs of approximately equivalent size. It does not inspire confidence in an urgently-needed trade deal with an economy that is seven times the size of the UK’s – despite our “Special Relationship”.
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