Now it is renegotiating the failed Withdrawal Agreement, the Government must seize the opportunity to ensure any revised deal works properly for financial services, one of the UK’s most successful industries.
The agreement currently falls short on two main counts. First, it subjugates the City’s competitiveness to EU control through the transitional period and during the Northern Ireland backstop, handing the EU leverage to insist the UK agrees to similarly damaging provisions in any negotiated trade deal.
Secondly, it exposes UK taxpayers to the remote but real possibility of huge losses during the transitional period, since the UK would be forced to apply EU rules, which could become dangerously inappropriate.
With a benign application of the agreement’s good faith provisions all could be fine, but no meaningful contracting party operates on such a wing and prayer. The EU doesn’t.
The referendum was a vote for sovereignty. And yet the agreement seeks to suppress the UK’s competitiveness through the imposition of its state aid rules during the transition and under the backstop.
Their application is to be interpreted by the ECJ and unilaterally overseen by the Commission. The law-making ECJ has expanded these rules far beyond their original purpose to govern states’ fiscal policies and other potentially incentivising measures.
There are further restrictions that would fetter the UK’s ability to compete with its main financial services rival, New York. The rules on social standards, crafted for the EU’s industrial, tariff-free zone, are not calibrated for the financial services industry’s longer-term needs.
The transitional period is conceivably justifiable for goods but does not work for financial services. By requiring the UK to apply EU laws, interpreted by the EU, it exposes UK taxpayers to massive losses. The UK’s regulators will have lost dominion over their own rule book.
The EU then seeks to leave the negotiation of post-Brexit access arrangements for financial services to during the transition period. But the UK cannot permit the EU to swing a stick of uncertainty back and forth across the transom in this way, dangling the possibility of equivalence recognition to firms while using its state aid rules to restrict the UK from taking measures to provide for an attractive alternative.
The good news is there is a silver bullet that blasts away these shortcomings and removes the need for a transition. This is based on the existing EU law concept of equivalence, which is already used by the EU for its financial services trade with the US, Singapore, Mexico and elsewhere.
Under this concept, so long as the parties’ financial services laws meet the same high-level outcomes, each party’s firms can access the other’s market, cross borders without restriction, while remaining regulated solely in their home state.
Minor amendments need to be made, filling in gaps in the existing arrangements, defining the required outcomes by reference to international standards where possible, and adding procedural certainty.
With those changes, existing business models can be maintained, contingency plans ditched and the benefits for both parties of current access arrangements under the so-called “passport” can be replicated.
The EU has already agreed to such an approach, in November’s Political Declaration. The arrangements should be put in place now, before Brexit.
This requires no new work. I have set out a detailed Treaty text showing how it can be done. There is no benefit to either party in commencing with anything other than full-scope access.
If the parties’ regimes diverge over time in a particular sector, access for that sector can be withdrawn. This is unlikely to be the case for the UK, given its commitment to international standards, but the possibility remains.
The EU also desperately needs the City to continue treating eurozone government bonds as truly sovereign, permitting member state financing to operate at levels unsupported by the international regulatory capital regime. Enhanced equivalence would permit the UK to do just that, since the UK would remain exposed to the eurozone but would retain other levers to address build-ups in euro risk.
The EU has already, by its actions, acknowledged the economic reality. It has recently declared UK-based clearing houses and depositories to be equivalent from Brexit day. Other such declarations are likely to be forthcoming.
Notably, equivalence comes with none of the price tags the EU negotiators have sought to impose. It comes with no state aid, social or other restrictions for the financial markets. The restrictions attempted by the EU are not paralleled in its numerous existing equivalence arrangements elsewhere, so they cannot in good faith be suggested for its close friend.
Now is the time for common sense. A Withdrawal Agreement will only be executable if fair. The parties should move to implement equivalence-based access for financial services from March 29. The transitional period should be dropped, along with any attempt to attach unacceptable restrictions on competitiveness, ensuring a win-win outcome for all.
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