London’s financial services industry wants a post-Brexit trade deal that grants extensive access to the EU market.
If Brussels won’t let them have this, well, it doesn’t have a Plan B.
City lobbyists insist they will continue to sell their preferred option to EU27 countries, hoping to widen cracks between national capitals on the issue with a massive cross-Continent lobbying effort over the coming months. They believe that what they regard as the overwhelming logic of their idea will win through and they can exploit potential divisions among EU countries to make it happen.
The options for the City appear to be shrinking
The European Commission appears to be doubling down on its negotiating position that an eventual trade deal between the U.K. and the EU will not include broad access for financial services.
At a Council technical seminar Tuesday on the subject, the Commission reiterated its analysis that the U.K.’s Brexit red lines preclude a sweetheart deal for the City, according to people present at the meeting. And Reuters reported Wednesday that officials from the EU’s executive have been telling industry representatives from the Square Mile the same thing for weeks.
“We don’t have a Plan B. The reason is because Plan A is a bloody good idea” — Head of government affairs at a bank in London
Brexiteers — who occupy a fringe position in the financial services world — do have a Plan B that they say is more important now than ever to pursue seriously. They advocate making the best out of a no deal by rolling back rules to attract more business.
EU chief Brexit negotiator Michel Barnier’s opening position on Phase 2 of the Brexit talks — which are due to get underway in earnest in April — is that the U.K. is heading for a basic Canada-style trade deal with very limited provisions on selling services cross-border. He set the tone back in December when he said there would be “no place” for financial services in a trade deal. “There is not a single trade agreement that is open to financial services. It doesn’t exist,” he said.
For access beyond that, the Commission says the U.K. would have to rely on the existing “equivalence” framework, where a limited range of services can be sold to EU clients on the basis that the rules on each side are similar enough. In its current iteration, that only allows for around a quarter of the access firms get today via “passporting,” where EU firms can sell services across member countries. What’s more, the equivalence designation can be withdrawn at short notice.
The announcement was a torpedo in the bow of the City’s main lobbying effort, which focused on approaching passporting levels of accessunder the framework of a free-trade agreement on the basis that rules yielded similar outcomes, even if they didn’t look exactly the same. Divergence would be managed by joint supervision and a dispute resolution mechanism.
“We don’t have a Plan B. The reason is because Plan A is a bloody good idea,” said one head of government affairs at a bank in London.
The Brexiteer camp says that’s exactly the problem. Without coming to the negotiating table with a credible Plan B for a no-deal scenario, the government has no believable threat to walk away from the negotiations and so will end up swallowing what the EU offers.
Speaking at a panel hosted by conservative think tank Politeia on Wednesday, Tory MP Bim Afolami said the negotiation process in Brussels “is a highly political process,” which means the U.K. needs to “prepare for the eventuality that the EU really plays hard on financial services.”
“Are we brave enough to say, if you don’t allow us access to markets, we are going to compete aggressively?” he said, by easing up on rules, like the new revised Markets in Financial Instruments Directive, (MiFID II), or bank capital requirements, to “make sure the cost of capital goes down 50 basis points.”
The City isn’t backing down from their Plan A.
“All the usual suspects are pushing [the FTA proposal] as hard as we can,” said the government affairs head.
According to Miles Celic, CEO of lobby group TheCityUK, it has 50 visits across the EU27 planned over the next three months, on the heels of dozens of trips in the last few months.
“Hopefully in making the case for mutual regulatory recognition, people will recognize it is in their interest as well … we will continue to keep making the case and we are optimistic,” he said.
One thing all sides do agree on, though, is that the government needs to make up its mind on what position it will take, and fast.
The hope to exploit fault lines isn’t completely unfounded. Numerous member countries have indicated that they are in favor of the deal allowing for financial services access — they include Italy and Poland, as well as European Free Trade Association member Switzerland. And there are indications that beyond the Commission, there is creative thinking going on about a potential solution.
A proposal, reported by POLITICO, that the U.K. could pay for financial services access as part of a trade deal did not go down well with the industry in London. The fact that EU diplomats were even considering it suggests an openness to ideas among the member countries that would previously have been deemed heretical in Brussels.
One thing all sides do agree on, though, is that the government needs to make up its mind on what position it will take, and fast. The EU says it wants more clarity on London’s preferred option, but the U.K. government revealed recently it did not intend to publish a position paper on the financial services sector.
The industry is still unclear about where the Theresa May’s Cabinet stands. Although some ministers have expressed support for an FTA deal, “that doesn’t amount to a U.K. ask. That amounts to policymakers and officials sounding interested,” said the government affairs head. “There’s a world of difference.”