Chancellor Rishi Sunak on Monday told MPs Brexit will help “reinforce the UK’s position as a globally pre-eminent financial centre”, in spite of a looming regulatory stand-off with Brussels.
Government officials admit they do not expect the EU to make life easy for the City in the coming months, and debate is accelerating in the industry and among policymakers on how to reshape Europe’s biggest financial hub.
The EU has refused to grant “equivalence” rulings to most sectors of Britain’s financial services industry — a designation that recognises the quality of UK regulations and aids cross-border sales.
Although the EU and UK agreed in the Brexit trade deal to draw up a memorandum of understanding by March on regulatory co-operation, that does not guarantee Brussels will issue equivalence rulings.
One ally of Boris Johnson, the UK’s prime minister, said the EU had been “playing games” on the issue in an attempt to lure more jobs from the City of London to financial centres on the continent including Paris and Amsterdam.
On the question of when Brussels might certify British regulations as equivalent to its own, the ally said: “It would be wrong to assume that it’s guaranteed or that it will happen on a prescribed timetable”.
Mr Sunak told MPs in the House of Commons that the conclusion of the Brexit process would now allow Britain to “start doing things differently and better” in terms of regulation.
But Mr Johnson has admitted his EU trade deal did “not go as far as we would like” on financial services — which generally were largely ignored — and his allies admit things are not likely to improve in the near future.
Although many in the City regard Mr Johnson’s deal as effectively a “no deal Brexit” for the financial services sector, Mr Sunak has claimed that new regulatory autonomy in London could give the sector a boost.
Referring to Brexiters who claimed that the City could now enjoy another 1980s style leap forward, Mr Sunak told City AM that they “make a really, really good point”.
Referring to the Thatcher-era deregulation reforms that opened up the City to more competition and foreign investment, Mr Sunak added that people were free to “call it Big Bang 2.0 or whatever”.
Many companies anticipated the rupture on January 1 and moved staff and operations to EU centres many months ago to allow them to continue serving their clients there.
Accountants EY estimated that £1.2tn in assets had been transferred to the EU, and some 7,500 jobs, before the end of the transition arrangement on December 31.
Mr Sunak believes that nimbler regulation of the City could allow it to develop as a centre for emerging industries, whether with green finance or new listing rules to support new technology companies.
If Brussels decides third countries are equivalent, then EU entities can use financial services and institutions overseas without fear of possible sanctions. At present only the EU has the power to hand out equivalence decisions but the UK gained it following the end of the Brexit transition period on January 1.
But because financial services in the EU are not governed by a single set of regulations it is not possible for Brussels to issue one equivalence decision that would maintain the current level of market access. Overall, there are some 59 areas where equivalence decisions are possible.
In the run-up to the UK’s departure from the single market, Mr Sunak recognised 28 areas of EU business, covering areas such as exchanges, investment firms and credit rating agencies, that were equivalent to the UK’s own rules. He said that was a practical move in Britain’s own interest.
But the EU did not reciprocate and the imbalance has tipped trading in euro-based shares and sovereign debt into the bloc from its traditional base in London.
“The market has already started to adjust and the more entrenched those changes become, the less political will there will be to go back to the way things were through a comprehensive equivalence deal,” said Sherry Madera, head of government affairs at Refinitiv, a data provider.
Andrew Bailey, governor of the Bank of England, last week told MPs that the EU was not likely to grant equivalence to the UK in all outstanding areas of financial services for some time.
“The situation we find ourselves in is that the EU has said that it wants more information from the UK on what its future intentions are on regulation,” he said, adding that these requests were “problematic, frankly”.
Brussels’ attention is focused on crafting the joint memorandum of understanding with Britain on how to keep each other informed about future regulatory plans. EU officials see little prospect of further equivalence decisions until this work is done.
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