The UK is ready to set out its vision for how it wants financial services to operate after Brexit and favours an ambitious “mutual recognition” of regulations to preserve the City of London’s access to the European Union.
Under Britain’s proposal, the UK and the EU would recognise each other’s regulatory and supervisory regimes and would have aligned rules at the point of Brexit, with a mechanism that would monitor any divergence.
Three senior figures briefed on Brexit discussions in the UK cabinet said the government would back the proposal, which is also favoured by Bank of England governor Mark Carney.
One said: “They are going down the route of mutual recognition.” Another person close to the discussions called the preferred option a “dynamic reciprocal mutual recognition model”. The treasury declined to comment.
The UK's chancellor, Philip Hammond, is expected to endorse the idea in a speech that could come as early as next week. His allies cautioned, however, that a final decision on a preferred model had not yet been taken.
Dispute resolution
Under the British plan, the UK would commit to keeping its financial regulations in line with EU rules, and would cede authority to a dispute-resolution mechanism to calibrate the City’s market access or impose other conditions – for example higher capital requirements – if one side was seen to be breaking the spirit of the agreement.
The idea is likely to be welcomed by Britain’s financial services firms and is favoured by cabinet ministers because it would allow the UK to set its own rules to meet commonly agreed objectives such as consumer protection and financial stability.
Miles Celic, chief executive of TheCityUK lobbying group, said: "This has been our plan A, plan B and plan C for about 12 months or more."
The proposal was developed by the International Regulatory Strategy Group, an industry body that consulted widely across the EU, as an alternative to the EU's "equivalence" regime that applies to third countries.
But the idea is unlikely to win favour in Brussels and Michel Barnier, the EU's chief Brexit negotiator, has repeatedly said the UK would not be able to negotiate special access arrangements to the single market for financial services.
Theresa May, who is to discuss Brexit with German chancellor Angela Merkel in Berlin on Friday, has said she wants to include financial services in a free trade deal. One ally of Ms May said: "Obviously our future relationship is a matter for negotiation."
Rachel Kent, partner at law firm Hogan Lovells and chair of the IRSG's work on the plan, said equivalence was "suboptimal for a variety of reasons" and would not work for Britain's financial services industry.
She said it covers only about a third of financial services activities, it requires third countries to shadow new EU laws and “equivalence” designations can be withdrawn by Brussels with 30 days’ notice.
Explaining the advantages of mutual recognition, she said: “This mechanism allows divergence, provided you remain aligned on principles and outcomes and you can agree what they are.”
Financial services
But the EU27 will take a tough line on financial services, knowing that protecting the City is one of Britain’s principal negotiating objectives. Any deal is likely to come very late in negotiations.
While the EU's free-trade deal with Canada – often cited as a model for post-Brexit Britain – does talk about regulatory co-operation on financial services, EU officials have stressed this is about encouraging closer alignment of standards rather than granting market access.
Mr Barnier said last month that even an ambitious trade deal could not change the fact that the UK would need to rely on equivalence – the standard market access arrangements for non-EU countries.
“Where allowed by our legislation, we will be able to consider some of the United Kingdom’s rules as equivalent using a proportionate and risk-based approach,” he said, emphasising that Brussels would never allow the UK to have access that could undermine the EU’s financial stability. – Copyright The Financial Times Limited 2018
