12 January 2017

TheCityUK, an influential financial lobby group, has today published a two-page list of key priorities for the UK’s financial services industry in the upcoming Brexit negotiations. Make a search for the word ‘passport’, and you won’t find it anywhere in the document.

In fact, TheCityUK appears to have dropped demands to keep the EU financial services passport as we know it – which allows UK-headquartered firms to do business across the bloc – and is instead calling for the UK and the EU-27 to conclude a “bespoke agreement that delivers mutual market access, transitional arrangements to allow for enough time to implement the new relationship, and access to talent.” This is indeed a significant shift, which can potentially have important implications for the UK Government’s negotiating strategy.

The document argues,

It is in the economic interest of the UK and the EU to continue to provide and have access to the widest possible range of financial and related professional products and services without the need to establish a commercial presence in both markets.

While still very ambitious, and rightly so, this formulation is essentially an admission that certain financial services could be left out from a future UK-EU deal. The latter, according to TheCityUK, should include:

  • The ability to provide financial services “to existing and new customers as applicable”;
  • Continued close cooperation among UK and European financial regulators – similar to what the EU is already doing with other third countries, notably the US.

The case for staying in the single market has just got weaker

The most important consequence of this change of heart among the financial services industry is that the case for the UK remaining a full member of the single market has just got weaker. One of the main arguments, although admittedly not the only one, made against leaving the single market is that the UK’s role as a global financial hub would be undermined by the loss of the EU passport. However, the situation looks rather different now that the financial services industry seems to have come round to the view that keeping the passport as we know it is no longer a top negotiating priority. Upon closer inspection, might this be the same for other industries?

Another interesting point raised by TheCityUK is that any UK-EU framework agreement on financial services “should not inhibit the ability of the UK or the EU to achieve similar arrangements with other countries.” This is a further signal that the financial services industry does recognise the opportunities offered by Brexit in terms of the UK gaining the freedom to negotiate specific arrangements with other jurisdictions, potentially via concluding its own trade deals. Hence, preserving the widest possible access to European markets should not come at the expense of access to other markets in the rest of the world.

Growing consensus on bespoke deal to ‘top up’ equivalence

It is also worth stressing that the position now adopted by TheCityUK is broadly in line with what Open Europe argued in its report from last October, ‘How the UK’s financial services sector can continue thriving after Brexit’. We worked on the assumption that the UK would leave the single market and therefore lose access to the passport – and assessed the possible alternatives.

We concluded that the EU’s existing equivalence regime is useful but is clearly not a definitive solution, and therefore needs to be bolstered by bespoke arrangements for those sectors where no alternatives to the passport are on offer – wholesale banking being the key one. We recommended negotiating ‘pre-emptive equivalence’, to ensure that UK regulations are deemed equivalent by the European Commission as of Day One of Brexit.

We also suggested establishing joint UK-EU regulatory committees, so that the UK can continue to give its input on future EU financial services laws and regulatory divergence over time is avoided. Finally, we warned against a cliff-edge situation and prolonged uncertainty, arguing that transitional measures deserved thorough consideration.

The UK Government is expected to disclose at least the broad thrust of its negotiating plans in the coming weeks – starting with Prime Minister Theresa May’s much-anticipated Brexit speech later this month. As I already wrote on several occasions, giving up full membership of the single market always sounded like the most logical move – and one that would allow everyone involved in these negotiations to stop going round in circles on the ‘four freedoms’. The document published by TheCityUK today suggests we just got one step closer to it.