Westminster is pressing for its financial center, otherwise called the City of London, to have unlimited access to the EU’s financial markets after the Brexit transition period ends.
Britain ended its EU membership on the 31st of January after more than three years of endless discussions, but how it will conduct trade with the remaining 27 EU member states is still up for debate. Classified documents, captured on camera, revealed the UK government’s plans for a “comprehensive, permanent equivalence decision” with Brussels.
If the EU were to grant the UK “comprehensive permanent equivalence” rights, then it would give Britain access to the bloc’s financial markets as long as it abides by EU regulations and standards. According to a publication by the UK Parliament entitled Brexit and financial services, financial services make up a large chunk of the economy.
‘Financial services made up 6.9% of the UK’s total output in 2018 and contributed £29 billion in tax in 2017/18. London (and the UK more generally) has benefited from close commercial and regulatory integration with the EU.’
‘That exclusion has led to a focus on “equivalence”. This allows market access in specified activities if both parties agree that underlying regulatory approaches will achieve comparable outcomes. It assumes current and continued regulatory alignment.’
‘The UK’s original ambitions for Brexit negotiations recognized the interconnected nature of financial services, while aspiring to more autonomous decision-making. But equivalence decisions depend on continued compatibility between regulatory outcomes. They are subject to review and unilateral cancellation. The process of agreeing frameworks can also be slow and subject to wider political considerations. The EU recently withdrew equivalence from Switzerland. They referred to both Swiss “delays” on agreeing wider arrangements and the challenges of Brexit.’
‘Single Market rules allow financial businesses authorized in any Member State to operate freely across the European Economic Area (EEA). This system is known as passporting.’
Various EU officials have warned that the bloc could sever Britain’s access to its financial markets if Westminster were to veer away from European standards. On the contrary, the UK’s Prime Minister, Boris Johnson, has already unveiled his intentions to steer the country away from EU rules.
Finance Minister Sajid Javid said Tuesday that the UK is seeking a lasting and balanced trade relationship with the bloc with access to the Eurozone’s financial markets. But Mr. Javid’s comments were not received well by officials in Brussels.
Prime Minister Boris Johnson finally ‘got Brexit done’ on January 31st at 11 p.m. but with this accomplishment comes the imminent threat that the UK could lose access to the EU’s financial markets. Mr. Javid drew parallels to the financial sectors of both sides as being equal in terms of regulation. He also pointed to the idea that a stable deal is crucial if a long-lasting relationship is to be secured before the end of the year.
On the other hand, EU Chief Brexit Negotiator, Michel Barnier, crippled any hopes of privileged access to the bloc’s financial markets following the leaked evidence detailing the UK’s negotiating stance on the post-Brexit free trade talks.
On February 11th the EU’s Michel Barnier warned Sajid Javid, Britain’s Chancellor and Prime Minister Boris Johnson that ‘they should not kid themselves’ into thinking that they will gather a special agreement.
“I’d like to take this opportunity to make it clear to certain people in the United Kingdom authority that they should not kid themselves about this. There will not be general open-ended ongoing equivalence in financial services, nor other management or financial agreements with the United Kingdom. We will keep control of these tools, and we will retain the free-hand to take our own decisions,” Barnier said.
To watch Michel Barnier’s full speech click here.
Post-Brexit discussions are scheduled to begin next month, as the UK and EU battle it out in future trade talks.
Once the transition period ends, the way the UK’s financial services sector does business in the Eurozone will change. The UK is confident that Brussels will consider the UK’s regulatory system as being equivalent to the EU’s regulations.
The leaked document, photographed outside number 10 Downing Street, states that the UK will be looking for a ‘comprehensive, permanent equivalence decision’ granting Britain’s financial services sector privileged access to the EU’s financial markets.
An equivalence deal of this sort would mean that foreign firms including investment companies could do business with EU clients from outside the eurozone.
Mr. Barnier told members of the European Parliament that the EU will not even participate in discussions of such an idealistic deal. ‘We’ve always respected the choice made by the United Kingdom however much we may have regretted their decision to leave the European Union. The Prime Minister, Boris Johnson, said that in leaving the European Union the United Kingdom was not leaving Europe, we welcome that resolve. The question which arises and for which we have no reply up until now is this: the UK is leaving the EU, the single market and the customs union, does it also wish to leave our economic and social model and from the European regulatory model it’s very familiar with because we built it with the UK over a period of 47 years. That is the question upon which we are waiting a reply. What distance does the UK wish to adopt in terms of our economic and social model and our regulatory framework? It is up to the United Kingdom to decide how consistent it wants to be with our regulations or how much it wants to compete with our regulatory regime,’ said Mr. Barnier.
An equivalence deal would need to be secured before July, but this seems unlikely as Brussels has criticized the UK government’s decision to ban an extension to the transition period, calling it a ‘restriction’ on the negotiations.
Mark Carney, the Governor of the Bank of England has warned against the UK adopting EU regulations. He advised MPs in Westminster on Tuesday 11th of February, that the integrity of the UK’s financial sector would be threatened by being under the rule of EU regulations and standards.