The U.K. government's plans for financial services after Brexit are not expected to include a commitment to mutual market recognition with the European Union, which has been its preferred option until now.
The government is set to publish, in the week of July 9, a policy document, or white paper, following a July 6 meeting of senior politicians led by Prime Minister Theresa May at her country retreat, Chequers. The gathering is aimed at thrashing out options for the U.K.'s future dealings with the European Union. Deep divisions in May's cabinet between hardliners who want the U.K. to have total autonomy from the EU's institutions and those who lean toward a customs relationship with the bloc, are expected to surface at the meeting. Much of the discussions will focus on the trade in goods, rather than services.
TheCityU.K., the lobbying group that represents the U.K.'s financial industry and which has lobbied for mutual market recognition, said it expects the government to support a different arrangement.
"We do not expect the white paper next week to use that language 'mutual market recognition' because that term can be pretty problematic for the EU," said Jack Neil-Hall, a spokesman for TheCityU.K.
Instead, TheCityU.K. expects the government's White Paper to outline its proposals for "mutual market access" which would be based on an "outcomes based system."
"That means we will not judge our rules on a line-by-line basis against EU rules but if the outcome that we are trying to achieve is the same in terms of financial stability and consumer protection is the same then that's fine. And if there is a change to the way each side is regulated then let's review it together," said Neil-Hall.
How disputes are reviewed is key because the U.K. has been pushing for a third party adjudicator to settle disputes, while the EU is determined that the European Court of Justice will decide while the Prime Minister has said the ECJ is a "red line" for the U.K. which it will not accept.
Financial entities in the U.K., from banks to insurance companies, can offer their services across the EU through a system known as passporting which allows any EU-based company to sell services across the EU. However, this system will not be available to the U.K. once it quits the EU in March next year — though a transition period till the end of December 2020 is expected to be agreed during which the U.K. will be considered to be part of the EU for the sake of regulation.
Instead, the government, after sounding out leading City institutions, has said mutual market recognition, whereby the U.K. and the EU would accept each other's regulatory regimes while a third party arbitrator would settle disputes, was its preferred option for a post-Brexit world.
However, the EU's chief negotiator, Michel Barnier, has said the EU will not accept such an arrangement. Instead, the EU has proposed the U.K. adopt an "equivalence" regime in financial services after Brexit, whereby existing financial services trading arrangements could continue as long as the EU deems the two regulatory regimes to be equivalent and the European Court of Justice could adjudicate over disputes. Under this approach, the EU would have the right to withdraw from the arrangement unilaterally.
'Third country status'
Sir Mark Boleat, deputy chairman of the City of London corporation, which runs London's financial district, is skeptical that the U.K. will achieve even mutual market access.
"Mutual market access will probably remain the objective but is not achievable. Equivalence will work for a small part of the market. Third country status will probably be the default," he said.
The City does not want "equivalence" because the EU can withdraw co-operation at any time. The EU's relationship with Switzerland, which is not an EU member, has caused concern in the U.K.: the EU granted the Swiss stock exchange access to the EU but only for a year from December last year after which any agreement on access will have to be renewed.
Chancellor Philip Hammond and the Bank of England have argued over prospective post-Brexit arrangements, with the Bank determined that the U.K. does not become a "rule taker" from the EU while Hammond has publicly committed to the idea that the U.K. should not become an "automatic rule taker" which the Bank feared could put the U.K. in a subservient position to the EU on regulation.
However, in his Mansion House speech to the City earlier this month, Hammond said the EU was attempting to force U.K. based financial services to set up within the EU and appeared to back mutual market recognition though he did not use the phrase.
Any proposal short of accepting equivalence is likely to face considerable opposition in the EU, which has consistently said anything else is unacceptable. Barnier's office will not comment on ongoing discussions with the U.K. over financial regulation but it pointed S&P Global Market Intelligence toward a speech Barnier gave in April this year on the topic where he stated:
"The EU understands that the U.K. does not want to become a 'rule-taker.' But the U.K. also needs to understand that the EU cannot accept mutual market access without the common safeguards that underpin it. This is needed to maintain financial stability, investor protection, market integrity and a level playing field. This objective would not be reached if financial institutions could operate in the EU, or serve clients in the EU, based on an authorization by the supervisors of a third country, subject to the rules, supervision and enforcement mechanisms of this third country alone."