EU rejects Brexit trade deal for UK financial services sector
Brussels negotiators say Europe would benefit from a smaller City of London
EU Brexit negotiators have set out a tough line on financial services, ruling out an ambitious trade deal for the lucrative sector and arguing that Europe would benefit from a smaller City of London, according to confidential discussions among the other 27 EU member states.
In a rebuff to the UK, which is seeking to put financial services at the heart of a trade deal with the bloc, an internal EU27 meeting this week concluded that future arrangements should be based on “equivalence” — the limited and revocable access given to third-country institutions — rather than a wide-ranging new pact.
At present, such provisions give financial groups from countries such as the US conditional access to the single market for some services.
“There was a strong commission message that there would be no special deal,” said an EU diplomat briefed on the discussions — a first attempt to thrash out the bloc’s position on the issue before negotiations with Britain start in March. “The UK is being told from the beginning what the situation is.”
Another EU diplomat said: “They are out of the internal market, that’s it. There can only be a much less ambitious agreement.”
Ensuring that financial services are not badly hit by Brexit is a top priority for the UK, since the sector is Britain’s biggest source of exports and tax revenue.
Theresa May’s government has also argued that if the City were damaged it would adversely affect financial stability and EU groups’ cost of financing, while contributing to the fragmentation of the sector.
But participants said that in the EU27 meeting the European Commission played down the risks of cutting off the City to EU businesses, saying that the financial sector was mobile enough to adapt.
They added that the commission maintained that a smaller City could benefit financial stability and the development of capital markets in the EU27, an argument that Spain also vocally supported.
The discussion focused on future relations after a transition period that Brussels intends to end by December 31 2020.
The commission negotiator also told the meeting that giving the City extensive market access could leave the EU more vulnerable in a crisis.
Brussels’ fear is that, in a financial emergency, UK regulators would prioritise continuity in companies’ UK operations over their activities in the EU27. This could lead to outflows of capital and liquidity or the withdrawal of vital services at a critical moment.
One senior diplomat said that the commission had underlined the importance of making sure that the EU did not lose “influence” over the UK financial sector, which could “have such a huge impact on the EU”.
While no country contradicted the approach of the commission, which is conducting the negotiations with the UK, the discussion highlighted differences between member states.
Germany, Sweden and Luxembourg cited the benefits of continuing co-operation with the UK, while France argued that the costs of a hard break would be limited and easy to contain.
Like the commission, Paris said there was a need to prevent the UK undercutting the bloc’s financial rules, and urged Brussels to encourage London-based companies to trigger relocation plans.
According to one person briefed on its thinking, the commission will send out notices warning a wide range of different financial groups to be prepared for Brexit and the lapse of the UK’s rights as an EU member.
These include banks and payment service providers, insurers, asset managers and brokerages, as well as auditors and credit-rating agencies.
Brussels has already prepared itself for Brexit by toughening its criteria for granting equivalence to systemically important non-EU financial centres, and the commission negotiator told the meeting that intensive talks would be needed with the UK on financial stability arrangements.
The commission official also said that the ball was in the UK’s court to set out ideas for how trade in financial services might operate after Brexit.
A UK government official said: “We are confident of negotiating a deep and special economic partnership that includes a good deal for financial services, and protects the City of London’s position as the world’s leading financial centre.
“We start from the unique position of regulatory alignment and trust in one another’s institutions. The UK’s financial services sector plays an essential role in the European economy and so it is in the interests of all parties to secure a deal.”