The UK government plans to start urgent talks this week in an attempt to hammer out an agreement by March to give the country’s financial service industry access to European Union capital markets.
John Glen, the City Minister, and Katharine Braddick, director general of financial services at the Treasury, will be leading the charge, liaising with financial services lobby groups such as the The CityUK and UK Finance to develop a memorandum of understanding’ over financial services with the EU by the end of February.
Although not intended to be legally binding, the memorandum will serve as the starting point for financial services trade negotiations and could lead to greater certainty for the City.
In 2019, the UK exported £60bn of financial services, £25bn of which was with the EU. However, the terms of the last-minute Brexit deal struck by prime minister Boris Johnson over the Christmas period focused mainly on goods and not on services.
One reason is that Brussels relies on the unilateral equivalence system for determining what access other countries should have.
There are roughly 40 equivalence provisions scattered in different EU financial regulations, covering everything from use of non-EU trading platforms and clearing houses to reliance on credit ratings. They grant market access on the basis that another country’s financial regulations are as tough as those in force in the EU.
There had been hope late last year that some type of arrangement could be worked out, but the European Securities and Market Authority stood firm, especially on the derivative front.
Last November, the Paris based watchdog confirmed that European banks operating in the UK would continue to be subject to EU regulations when the Brexit transition period ended on 31 December 2020.
The result is that the EU currently has the power to block London-based firms from trading inside its market with 30 days’ notice. The ‘memorandum of understanding’ being developed by the Treasury and other officials could extend this period in a bid to give UK firms more trading confidence.
The lack of equivalence arrangements has also meant that both sellside and buyside firms as well as lawyers and other financial service professionals have lost their automatic right to work in the EU. Their qualifications are no longer recognised, meaning they will need to apply for the relevant certification in the countries they wish to work in.
This explains why the last four years has seen banks and fund managers open as well as expand existing operations in the EU. Estimates from EY reveal that more than £1 trillion of assets has been moved from London to the EU since 2016.