Hopes have been raised that the UK will strike a bespoke deal on financial services with the EU, keeping the vital cross-Channel trade open after Brexit.
Philip Hammond, the Chancellor, is poised to launch the plan as the centrepiece of a key speech as soon as next week, proposing a system of mutual recognition in financial regulation – allowing UK and EU firms to trade freely, but crucially enabling Britain to set its own laws.
The aim is to ensure both sides base their financial regulations on the same principles, so even as precise rules diverge after Brexit the laws in each market have similar effects. If the EU accepts the plan, it should mean both sides will be happy to allow institutions from the other access into their markets. The proposed system also requires some co-operation between politicians and regulators to ensure there are no surprise changes in the rules. An independent tribunal will be put in place to resolve any disputes.
It contrasts with the current system of trade with non-EU members which focuses on regulatory equivalence – a system which would not allow the UK any regulatory freedom, leaving it with no say on financial rules. Key figures in Britain’s financial services sector welcomed the plan, which was first reported by The Financial Times.
Miles Celic, chief executive of industry group TheCityUK, said he would be “very pleased” if the plan was adopted. “The starting point for all our companies is, how do we look after our customers on March 29 next year?” he said, referring to the official day of Brexit.
“Beyond that, it is about how to maintain London as an international financial centre, not just for the benefit of the UK but also for the benefit of Europe and international clients around the world. Mutual regulatory recognition allows for that.”
It also allows Britain to be in charge of its own rules: “Being a rule-taker on an open-ended basis is not a runner,” he said.
Stephen Jones, chief executive of UK Finance, agreed. “Including an ambitious framework for trade in financial services in any future agreement is in the interests of both sides,” he said.
“Through mutual recognition, closely aligned standards and supervisory cooperation, we can preserve some of the benefits of market access without sacrificing regulatory autonomy.”
It is also a victory for Bank of England Governor Mark Carney, who has long advocated similar ideas and warned against the dangers of a breakdown in financial markets between the UK and EU.
He argued the UK and EU both benefit from the current open regime, and that a system of mutual recognition will keep these benefits.
A “system of deference to each others’ comparable regulatory outcomes, supported by commitments to common minimum standards and open supervisory co-operation” and with “a new, independent dispute resolution mechanism” would fit with “the UK Government’s stated aim of a new, comprehensive, bold and ambitious free trade relationship with the EU,” he said in a speech in Canary Wharf in April.
But if this is not done, and the flow of finance and trade across borders is stifled, this risks “fewer jobs, lower growth and higher domestic risks”. The Bank of England declined to comment on the latest developments.
It is not yet certain the EU will accept the plan. Late last year the EU’s chief negotiator, Michel Barnier, warned that it would be tough to strike a deal on financial services as it has never been done before: “There is not a single trade agreement that is open to financial services. It doesn’t exist.”
Mr Celic has lobbied for mutual recognition to be adopted, meeting politicians in Brussels and in EU nations. He said those with a particular focus on the economic implications of Brexit are most open to the plan. This particularly applies to those who are experienced in EU financial matters and realise the existing rules on equivalence are not suitable for a nation like the UK, with an enormous financial sector and a large number of EU customers.
By contrast, policymakers who prioritise politics and the technicalities of the Article 50 process are not as keen when first approached. The timing of the proposals is also crucial. Foreign banks in the UK had warned they need some reassurance on the planned Brexit deal by the end of March otherwise some would enact plans to move staff and activities to other EU nations, so this plan comes in time to attempt to provide that certainty.