BrexitCentral: The Brexit White Paper proposes a win-win path for financial services

Theresa May’s Brexit White Paper has many controversial elements but the plan for financial services is broadly right. There may be adjustments to be made elsewhere, but the UK should avoid the proposals for services being caught up in a re-vamp of the approach on goods.

The White Paper aims to enhance the EU’s (and UK’s) existing equivalence regime for financial services. This regime is one which the UK has been instrumental in developing over the last few years and already underpins mutual access and mutual recognition arrangements between the EU and other countries in financial services.

Even without any recognition arrangements in place, there are other ways to serve EU27 customers – particularly wholesale customers. But businesses are used to operating within the wider ‘’envelope” that recognition arrangements provide and tend to prefer to have these in place so long as the City’s financial regulations remain pro-competitive and apolitical. Moreover, an enhanced equivalence approach would avoid partial fragmentation of businesses on Brexit, which could reduce or remove liquidity and cause unpredictable economic harm – principally to the EU27.

What matters will be how equivalence is enhanced. Various French (and connected) officials have tried narrow the existing EU equivalence laws since the referendum outcome, in the hope of forcing businesses to come to their shores. However, it could be a highly damaging strategy for the EU27 if one country’s interests were preferred at the expense of the rest and the costs to the other EU27 members were ignored.

So far, the results of these efforts have, predictably, been limited. Furthermore, the EU as a priority needs some sort of deal on goods and agriculture as well as an exit payment from the UK. So sensible equivalence enhancements for services are under discussion and common sense appears to have taken root.

In A Template for Enhanced Equivalence, published in July last year, I aimed to fill the gaps in existing equivalence regimes and define equivalence by reference to high level outcomes. The UK’s White Paper proposals appear to reflect what was set out there. They would, if followed, mean neither side is rendered a rule-taker. The regime would also provide for procedural certainty, ensuring that if there is a fundamental difference in view on what outcomes should be met on a particular topic, the UK (or EU) can cease to be equivalent on that topic, losing access after a reasonable period.

Businesses would in such circumstances serve customers in the other’s market in the normal way. They would have time to deploy the various work-arounds that would permit them under international law arrangements to access EU27 clients. But the proposals are different in one respect to the Template: they suggest that no independent Tribunal would oversee the application of the equivalence definition. That may be because of the political realities, and the UK is therefore seeking to provide for certainty and fairness through procedural mechanics instead.

What matters now is that the drafting is subject to the right legal oversight, and crafted for precision, clarity and certainty. Equivalence needs to be defined in a manner setting out genuinely high level outcomes. The arrangements must not allow for any political stick to be wielded over the other party to conform. Rather, the procedures must allow for businesses to plan ahead. The UK sensibly proposes a provision ensuring all contracts remaining to be performed are protected and can continue being performed in the event of equivalence recognition falling away on a particular topic. This would recognise international law on acquired rights and avoid any potential jitters on the efficacy of the law in those circumstances.

Indeed, this route is the best way forward for a Brexit deal in financial services. Other options mooted since the referendum achieve no more, introducing new terminology to no benefit. And reverting to some form of passport would introduce unmanageable systemic risk for the global financial markets. In fact the EU’s single rulebook has become increasingly problematic for the global markets anyway and it was a mistake not to have adopted some sort of solution like this after the 2007-8 financial crisis.

As a result, whilst certain aspects of the White Paper need further attention, for services it seems directionally acceptable. The so-called flanking agreement for goods, by which the UK offers not to lower the UK’s existing standards on areas such as social standards and consumer protection, should not be allowed to seep into services. These arrangements are to do with EU concerns over customs and smuggling. The UK must retain flexibility on topic of services, whatever the arrangements reached on goods. There are also points to be added, such as the mutual recognition of legal privilege. But overall the controversy about sovereignty or the best route to frictionless access on goods should not affect thinking on services and should not be allowed to infect the finalisation of the services arrangements.

The UK’s Government and Treasury have clearly made progress. For financial services, the White Paper presents a significant advance and offers a win-win outcome. What is now key is that the UK announces policies optimising the no-deal fallback so businesses are fully hedged. Tax incentives and radical removals of regulatory red tape, contingent on that eventuality, are now required in order to remove residual business concerns.

To read Barnabas Reynolds’ piece in full, click here.

sign up to our Newsletter