HM Government has published its proposed framework for the UK-EU partnership in Financial Services (Proposal), building on its earlier White Paper. The White Paper put forward an “expanded equivalence” model for the future of EU-UK financial services business.
The UK and EU financial services markets are currently highly interconnected, via the EU single market and the EU passporting regime that enables financial institutions authorised in one EU/EEA Member State to trade freely in the others with minimal additional authorisation. Firms based in “third countries” (non-EU countries) do not benefit, or at least not in full, from this regime and therefore face barriers to providing cross-border banking and investment services. One can understand why the UK wishes its future access to be, in Theresa May’s words, “as frictionless as possible”.
The Proposal begins by setting out the UK’s importance as a financial centre; over 95% of euro denominated derivatives are cleared on UK infrastructure, UK located banks underwrite around half of the debt and equity issued by EU companies, the UK has the largest share (37%) of global foreign exchange trading in the world, and so on.
We are warned repeatedly throughout the document that financial stability is a shared interest. It does not expressly acknowledge that the UK will be a third country (or that it will lose access to the passporting regime), but makes clear that a third country deal would not be good enough for the UK.
The Proposal cites recent EU bilateral agreements with the US on TTIP (Transatlantic Trade and Investment Partnership), and with Japan. An entire slide is devoted to the Japanese precedent.
The document outlines a two-fold relationship for financial services: an autonomous element, where the parties retain judgement about access to their own markets and legislation; and a bilateral element, which would include commitments and processes “ensuring transparency, stability and cooperation”. It recommends that each party retains its own “rulebook”, and where those rulebooks cease to align (or start to align) the other party may withdraw (or grant) access. Where there is withdrawal, this would be managed over time.
The Proposal is not untypical of HM Government’s general approach to Brexit, in that it includes a generous slice of “cakeism”. Essentially, it accepts the benefits of EU membership and passporting, and endeavours to recreate them (badging the relationship as something else).
The UK expects on-going access, but with the freedom to do whatever it wants on policy and legislation (and without accepting, for example, freedom of movement and other EU rules), while continuing to influence EU policy and legislation. Although divergence might lead to withdrawal, the EU could argue that the UK may use this strategically to arbitrage an advantage in specific areas.
The Proposal is woolly on the cooperation and dispute resolution elements. There is a passing reference to a UK-EU forum but, we must assume, this would sit outside the EU’s existing institutions.
Essentially, the document does not guarantee anything better than third country access, unless the UK continues to duplicate the EU rulebook. As a result and despite its protestations to the contrary, the UK might, to all intents and purposes, remain a rule-taker.
Finally, while the Proposal goes big on emphasising London’s systemic importance, it seems that other financial centres (and other prospective financial centres) might have designs on its market share. Whilst it is right that a disorganised decoupling could cause disruption, it seems likely that, over time, Frankfurt, Paris, Dublin etc. will seek (and get) an increased share of the financial services market. In this scenario, London’s importance, and its ability to play the disruption card, will gradually diminish.
The UK has published this document late in the day, when, according to Trade Secretary Liam Fox, “no deal” is a 60-40 possibility. JP Morgan has warned of 4,000 UK job losses and Goldman Sachs has started to move people abroad, taking up space in Paris and Frankfurt. Swiss investment bank UBS has said it “will definitely” be moving staff out of London.
If these job losses are to be stemmed, and London’s pre-eminence maintained, HM Government will need to move very quickly.
If you would like more information on this topic, please contact Douglas Hawthorn, Partner in Michelmores’ Banking, Restructuring & Insolvency team, and a member of the firm’s Finance and Investment sector group.