By: Tim Bennett
06.12.2018
Theresa May’s Brexit deal is under fire from some of the UK’s biggest banks and financial institutions. Tim Bennett explains why in this week’s video.
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Why is the City unhappy with the “Brexit deal”?
UK financial institutions want unfettered access to the EU’s markets and consumers (and vice versa, in fairness) post-Brexit, something they enjoy while we are part of the Single Market. But under current Brexit proposals we will leave the Single Market and won’t be members of the European Economic Area either, which includes Norway, Iceland and Liechtenstein.
This means current “passporting” arrangements that allow financial services firms to operate across the EEA, much as they do here, go out of the window.
Why does this matter?
Although the financial markets are clearly only one part of the UK economy, they are nonetheless a pretty key part.
What is equivalence?
A system that has been applied to non-EU countries such as the US for certain activities, whereby the EU recognises the regulatory system of another country as “equivalent” to its own and grants cross-border access and trading, in place of the current passporting arrangements. The latter allow firms to establish branches, with access to EU markets and customers, without having to establish fully autonomous operations, something which is relatively expensive and time-consuming to do. In effect, equivalence represents a “third way” around the current main options.
Is that the solution then?
Many think not. First, equivalence is not complete freedom from EU rules (as Brexiteers would like). As one commentator puts it “equivalence is not equality”. Second, it can take an unspecified time to activate, as dictated by the EU and meanwhile UK businesses would be left in limbo. Third, it can be withdrawn, or altered, at 30 days’ notice under current EU rules. Fourth, it doesn’t cover all activities (so most investment banking and insurance activities could be covered) but not retail banking (deposit taking and loans) or reinsurance – it is not clear how the latter could be incorporated within the rules.
What’s the alternative?
There are two in play;
- Since firms will lose their passporting rights when we leave the EU, they could establish fully fledged subsidiary operations within every separate EU member state to guarantee access to its markets and customers. Some have started to do precisely that already, but it takes time and is time-consuming and expensive (in terms of relocation costs and regulatory capital requirements)
- “Mutual recognition” whereby two regimes accept equivalence simultaneously. The EU don’t want to give us this “cake and eat it” solution – they want post-Brexit control over the process. And some of the issues raised earlier could still get in the way…
Conclusion
As things stand, the EU don’t want to let the UK withdraw from the EU club whilst retaining the benefits of membership, hence the pressure to strike an “equivalence” deal. Meanwhile, the City want the government to push for more influence on the basis that London is a key financial centre for the EU and will remain so after Brexit.
For investors, it’s a case of watch this space.
