Written by David Blake
This article was first published in Briefings for Britain and we republish with kind permission.
This is Part Two of a three part series, Part One can be read here.
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The UK’s City Minister, John Glen, who is leading the UK negotiating team on the MOU says ‘what we want is a model of structure and co-operation with the EU that allows us to maintain that stability and mutual market access’.
Clearly, simple equivalence is not the answer. A number of other alternatives have been put proposed. These include:
* ‘Enhanced equivalence’ under which the gaps in existing equivalence regimes – such as deposit-taking and lending – are filled in and regulations are accepted as being sufficiently similar, but without actually being identical. There would be two key issues to resolve: the EU and UK agree to treat each other fairly in assessing rules as being equivalent; and they would agree terms on which equivalence can be withdrawn without political interference.
* ‘Mutual recognition’ (including professional standards). A different alignment concept is ‘mutual recognition’ through ‘mutual market access’. This achieves a similar result as enhanced equivalence, but assumes that financial services regulation and supervision in the UK and EU would remain sufficiently aligned in the future. It would be jointly monitored by a committee to ensure regulatory alignment.
The EU has said it will refuse a financial services agreement based on mutual recognition, but a leaked draft of an annex to the EU’s Guidelines for negotiating a future trading relationship with the UK suggested that the EU might be willing to consider ‘improved equivalence mechanisms’ to cover financial services. The UK’s financial regulator (the Financial Conduct Authority) has issued a statement saying that ‘The FCA continues to view the agreement of mutual equivalence between the UK and EU as the best way to avoid disruption for market participants and avoid fragmentation of liquidity in [derivative] products [such as swaps], reducing costs for investors’.
Yet despite signing up to a G20 commitment to improve the functioning of financial markets (including over-the-counter derivatives markets), the EU has acted in a way that has deliberately contributed to the fragmentation of those markets. It seems to be determined to harm the UK’s financial sector, even if EU users of financial services are also harmed.
The TCA specifically makes ‘framework’ commitments on lowering barriers to services trade and the mutual recognition of professional qualifications. However, we know that the EU always takes a very long time to make decisions, typically 5-7 years. To circumvent this, the UK might end up having to negotiate 27 bilateral arrangements with each member state on mutual access to financial services.
This is clearly not as good as a formal EU-wide financial services deal. However, the UK’s bargaining position has been greatly weakened by what was agreed in the TCA. It’s déjà vu all over again. Our leverage in the negotiations between David Frost and Michel Barnier had effectively been destroyed because Theresa May and Boris Johnson had given away our strongest bargaining chips by committing to paying the £40bn divorce bill and agreeing to the disastrous Withdrawal Agreement which preserved the EU single market but at the cost of splitting the UK single market between Great Britain and Northern Ireland. The EU would never have backed itself into a corner like this. As it is forever saying: ‘nothing is agreed until everything is agreed’.
Yet we fell into precisely the same trap again by accepting the sequencing of the negotiations for the TCA that suited the EU. The first thing it wanted was a deal on fishing that preserved indefinitely its full existing access to UK fishing grounds. The final thing it wanted was a deal on financial services that would only be negotiated after the TCA was signed. And this is what it got, almost in its entirety. It was only last-minute pressure on Angela Merkel from German carmakers, fearful of losing their one million per annum car sales in the UK, that forced the EU to compromise and agree a 5.5 year transition deal for fishing. Surely, the UK-side could have insisted on a 5.5 year transition deal for financial services in exchange? But it was not to be.
It has been clear for some time what the EU’s terms for agreeing the MOU will be – for the UK to become a rule taker from Brussels in respect of financial services by adopting its financial services regulations and changes in those regulations over time, so-called ‘dynamic alignment’. It is not hard to work this out, because it is exactly the same as the EU demanded – and which Theresa May would have conceded had she still been in power ‒ for the TCA.
But this is the last thing we should accept. For a start, the EU hasn’t got a clue how to run a financial system. The main banks on the continent ‒ big names like Deutsche Bank, Société Générale, BNP, Santander, ING and UniCredit ‒ are in very serious financial difficulties (i.e., as close to insolvent as you can get) and the Eurozone is teetering on the edge of collapse. Further, the single market in financial services – one of the supposed four freedoms of the single market – has barely got off the ground, poleaxed under the weight of excessive regulations, like Markets in Financial Instruments Directive (MiFID) II, the Alternative Investment Fund Managers Directive (AIFMD), Capital Requirements Directive IV and Solvency II.
Andrew Bailey, the Governor of the Bank of England, has made it absolutely clear that the UK must not become a rule taker from Brussels. Speaking to the Treasury Select Committee, he said: ‘the UK must be able to make its own rules for the City, even if it means EU authorities refusing to allow access to markets across the Channel. If the UK agreed to take EU rules, it would be bound to follow Brussels’ decisions even when regulators in London thought they were unsuitable for British banks, or even threatened financial stability’. He pointed out that the UK already wanted to change the Solvency II rules governing the insurance sector and to reject the EU decision to count IT systems towards banks’ capital buffers.
Stay tuned for Part Three tomorrow.
As David Blake writes “.. Theresa May and Boris Johnson had given away our strongest bargaining chips by committing to paying the £40bn divorce bill and agreeing to the disastrous Withdrawal Agreement which preserved the EU single market but at the cost of splitting the UK single market between Great Britain and Northern Ireland.”……
Surely splitting the UK’s single market breaks the unity of the United Kingdom and so is a breach of the British Constitution. Any judges in the UK Supreme Court who want to defend British constitutional law could dismiss the Withdrawal Agreement/Treaty for that reason.