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UK Treasury plays down reports of split with Bank of England over Brexit

The U.K. Treasury insists reports of a rift between the Chancellor Philip Hammond and the Bank of England over the future regulation of financial services after Brexit are "overblown."

The Financial Times reported May 28 that the Treasury and the Bank were at odds over the degree of control which the European Union would exercise over the City after Brexit and that relations between the two were, in the words of an unnamed source at the Bank quoted by the newspaper, "very, very bad."

The rift apparently sprang from the growing fear in London that the EU will not accept the U.K.'s proposal for "mutual market recognition," backed by Prime Minister Theresa May in March, which would ensure the Bank had regulatory autonomy after Brexit as it would agree regulatory outcomes with Brussels but have freedom to set its own rules to achieve them. However, EU negotiator Michel Barnier appeared to rule out this proposal earlier in the year when he said the EU's financial stability could be compromised in such a situation.

Now the Bank fears Hammond is prepared to allow the EU to have significant sway over the City in return for a trade deal covering financial services, turning the Bank into a "rule taker" – something which the Bank's governor Mark Carney specifically ruled out last year when he said: "We do not want to be a rule taker as an authority."

Hammond, backed by the Treasury's head of financial services Katharine Braddick, has been careful to reject only "automatic" rule taking by the U.K. after Brexit and the Bank's deputy governor Jon Cunliffe has reportedly fallen out with the Treasury over the issue.

The Treasury is looking at ways of improving on the "equivalence" regime which is currently used by countries outside the EU, including the U.S., to access EU financial markets. The EU has said this would be a suitable regime for the U.K. but the chancellor has rejected existing equivalence regimes as "wholly inadequate" to handle the size of cross-border financial services trade between the U.K. and the EU.

However, a Treasury spokesman said the reporting of a "perceived difference" between the Bank's approach and the Treasury's was exaggerated.

The Bank declined to comment but the Treasury source, who declined to be named, said: "HM Treasury and the Bank of England are united in our aim to ensure the stability and prosperity of our economy" and referred to the chancellor's speech on the subject in March this year.

Then, Hammond said it "made sense, for both the U.K. and the EU that we continue to collaborate closely on cross-border financial services" and that it was in the interest of both the U.K. and the other 27 EU countries that businesses and citizens can continue to access the UK's financial services industry.

"We should be under no illusion about the significant additional costs that would be borne if this highly efficient market were to fragment," he said, noting that "these costs would be borne by Europe's businesses and consumers."