Forget equivalence, the City of London needs a post-Brexit plan

The latest “deal” between the UK and the EU was meant to clear a path to a new way of operating for the City of London. 

In reality, it feels more like the end of the road.

The memorandum of understanding agreed last month, depending on who in the City and Brussels you talk to, was minimalist, bare bones, a nothingburger, no progress or motherhood and apple pie.

In fairness, it was always likely to be that way. The Trade and Cooperation Agreement, sealed in December, specified the two sides should find some common ground on financial services by the end of March.

It was possible, theoretically, that this document could have signalled a substantive working relationship with technocratic collaboration and a route towards the equivalence decisions that would allow UK companies to operate more freely within the EU.

But no one really believed it would. What we’ve got instead is a commitment to exchanging information, every six months, which is an official basis for regulatory chit chat but really just reflects the fractious and untrusting relationship between the two sides.

Those looking for victories can pick through the diplomatic wordsmithing of the leaked text. 

“Informal” was dropped from early drafts; the meetings are “at least” semi-annual, suggesting scope for expansion; the involvement of other “stakeholders”, for whom perhaps closer co-operation may be beneficial, is welcome. Some optimists see scope to broaden the engagement.

Fundamentally, though, this is a political agreement for a political process. Regulators already have channels to talk to their counterparts. The memorandum was a prerequisite to further discussion, according to EU financial services commissioner Mairead McGuinness, but any further decisions will be made in the EU’s interests and on its own timeline.

The EU’s view of its own interests, for the moment, seems to involve driving more wedges into European capital markets, after the shift of share trading from London to the continent. 

The January paper on financial services, known as the “strategic autonomy” paper, made clear that it wants to move clearing of more euro-denominated derivatives contracts into the EU, based on debatable concerns around financial stability. 

The reality is that equivalence decisions have always owed something to political expediency as well as regulatory alignment. And it feels like a commitment to copy and paste Europe’s regulations for the ever after wouldn’t be enough to get the UK across the line at the moment. 

The best bet, say practitioners, is to wait a few years and hope the political heat comes out of the situation.

The ridiculous thing is that the great hope of equivalence was never a happy outcome for the City. Its group of regulatory practitioners explained over 170 painstaking pages in 2017 why something that could be unilaterally granted in 40 separate areas, on an uncertain basis, and withdrawn at short notice was an unsatisfactory way to do business.

Now that financial services groups have structured themselves around the status quo, setting up subsidiaries and offices inside the EU where needed, its value has dwindled further. 

The opportunity cost of divergence has also, in effect, fallen. The UK’s preference for principles and outcomes-based regulation already puts it culturally at odds with the EU’s rules-based framework. 

Expect, instead, to hear more about the importance of Asia and other emerging markets, with 95 per cent of population growth forecast to come from Asia and Africa by 2050 and a six-fold expansion in Asia’s middle-class by 2030. Also on the agenda will be the UK’s position in currency trading, a global market, as well as the opportunities presented in areas such as green finance and fintech.

This isn’t a cause for unbridled celebration. It has been a rude awakening that 11 per cent of tax revenues buys you barely a second thought at the Brexit negotiating table. And many of the opportunities related to markets 5,000 miles away would have been available regardless of the UK’s relationship with the economic bloc on its doorstep. 

But, faced with years more UK-EU wrangling, looking for a future elsewhere is the pragmatic thing to do.

helen.thomas@ft.com
@helentbiz