UK warns of damage to EU without special deal on financial services

The status of London as the world's financial hub may change after Brexit. [Andy Rain/EPA]

The UK has repeated its demands for a post-Brexit agreement on financial services to go way beyond the EU’s current standard with third countries in a new government paper, warning that a ‘hard Brexit’ will damage the EU.

The paper published on Monday (20 August) insists that “ruletaking (from the EU) …will simply not work for this sector”

The UK believes that the City of London’s status as Europe’s leading financial services centre gives it a position of strength in the Brexit talks, warning that the EU economy will also be hit if London suffers as a result of the UK’s exit from the EU.

It states that UK-located banks underwrite around half of the debt and equity issued by EU companies, that 1.4 trillion of European assets are managed in the UK, and that more than twice as many euros are trading in the UK than in the entire eurozone.

It adds that “if mutual market access is lost, independent analysis indicates economic benefits from UK FS activity relocating to the EU27 will be more than offset by negative fragmentation and lost efficiency.”

The EU’s standard agreement on ‘regulatory equivalence’ in financial services would not work, they say, because that would give the European Commission the power to rescind equivalence at very short notice. Instead, they are seeking ‘enhanced equivalence’ that goes beyond what the EU already has with other countries.

Instead, the UK wants its future deal with the EU on financial services to look similar to the new EU-Japan pact. That would mean access to each other’s markets together with a bilateral agreement covering regulatory co-operation, data sharing and dispute resolution.

That, says the UK, would “not require identical rules but will take an outcomes-based approach”.

May's Brexit blueprint faces backlash after sacrificing services

Even though Theresa May’s Brexit White Paper prompted a furious reaction from a large section of her Conservative party, not to mention a broadside from US President Donald Trump, not everyone was unhappy with it.

However, EU negotiators remain opposed to special treatment for financial services, while European Commission chief negotiator Michel Barnier has warned that the sector is unlikely to be covered in a trade deal if the UK insists on leaving the single market.

A separate paper on ‘fair and open competition’, also published on Monday, promises to commit the UK to “ongoing harmonisation” with EU rules on state aid; and to a series of “non-regression commitments” on the environment and social and employment standards.

That would keep the UK as a ‘rule-taker’ on state aid-related policy, adhering to rulings made by the European Court of Justice on state aid, and putting future EU revisions to state aid into UK law.

The move to enshrine EU environmental, social and employment regulations will disappoint Brexiteers on the right of May’s Conservative party, who had hoped to use Britain’s EU exit to unpick laws they view as overly burdensome on businesses.

But UK officials have dismissed the notion that Theresa May’s government views Brexit as an opportunity for a bonfire of regulations.

“Nothing could be further from what she (the PM) is about. We’re not going to reduce standards,” said a UK official.

“We are going way beyond what is in any other FTA (free trade agreement) – and that should encourage the EU to come back in a more generous way,” he added.

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