Christopher Howarth is a senior researcher working in the House of Commons. Prior to this he worked for Open Europe, as a Conservative Foreign Affairs Adviser and senior researcher to a Shadow Europe Minister. The first piece in this series was published yesterday.

Will we get a ‘deal’? Will it be a good deal? A bad deal? Is a bad deal really better than no deal? These are the new rules of Brexit short-hand.

While this sets up a good two-year-long journalistic drama, in practice our trade relations with the EU will not centre on the agreement of one, all-singing and all-dancing, ‘deal’. Instead, it will depend on a number of unglamorous standard bilateral and multilateral agreements that can and will be put in place before we exit the EU. On top of these basics, the EU and UK may then wish to add a WTO-compliant preferential trade agreement – the ‘deal’. Indeed, the EU now agrees there will be one “for sure”, but the absence of one should not concern us. If there is no ‘deal’ the sun will still come up in the morning: there will be no ‘cliff-edge’, as the parlance goes.

To shed some light on what will happen if there is no ‘deal’, it is worth looking at firstly a very vocal sector – financial services – and one technical issue that has received little publicity, but is in fact very important: agreements on the use of data.

The City of London in a ‘no deal’ situation

One of the more curious recent realignments in British politics is that of the ‘banker bashing’ pro-EU, internationalist left’s new found admiration for international capital as personified in the City of London. If the City were under threat from Brexit, it could now count on a new cohort of supporters from across the left of British politics. But is there a threat?

The first problem is that the City’s advocates have cried wolf at every opportunity. First the Euro; then EU membership; then Internal Market membership, now the “financial services passport” – all have been claimed by the City’s advocates as existential to the City. We were told by Michael Sherwood, a Goldman Sachs’ VP, before the referendum that “every European firm would be gone in very short order”. HSBC promised a “Jenga tower” of City job losses. These have all proved wide of the mark.

For an industry that prides itself on managing and profiting from risk, it’s odd that their reaction against Brexit looks a little like a Pavlovian response to change. So before we cash in all our political capital to keep them happy, what is it that the City actually needs? What is the passport?

The Financial Services Passport

There is no single market in financial services. If there were, there would be no need for a passport. In practice, there are separate national markets, tax regimes and law. On top of this we have the financial services passport, the most talked-about and most misunderstood concept in Brexitese.

In fact, there is not one “passport”. What it the term stands for is the ability of a firm to market financial products in another EU state without the need for further authorisations in the separate member states. The requirements to take advantage of the “passport” differs from sector to sector – from insurance companies to retail products.

The passport is a two-way process: there are 5,476 UK firms with a passport, with 8,008 EU firms using a passport to access the UK. The UK could, if it wished, decide to respect incoming EU passports. But it is unclear to what extent which of those 5,476 firms actually use their passports, or have simply followed their lawyer’s advice.

Retail financial products

The passport allows a UK firm to market, directly into another EU member state, the sale of retail investment products and services. Unsurprisingly, not many UK firms actually do this, as investment products and services remain largely based on national jurisdictions for reason of local tax and custom. Would a FTSE 100 indexed ISA be of any interest to a non-UK tax-paying German investor? Would it be wise for a retail customer in the EU to take up a sterling-denominated mortgage? Would a Eurozone bank seek deposits from UK customers and, if it did, would it be wise to put your savings in a Eurozone bank?

There is no single market in retail financial products. In practice, such cross-border trade as there is takes place between EU institutions puttting funds under management in London, or individuals who already aware of London and its tax and regulatory regime. The passport is not existential to a London-based business, but if it were, it would still be open to a London-based institution to open a subsidiary in an EU member state from which to apply for a passport to market their wares into other EU states.

Wholesale products

The other line of business that the passport has been said to be vital to is that of wholesale finance – investment banking. Again, this is not the case. As we have seen, for an institution to do business with a UK institution it is likely to contract a service in London, under UK law. This is important, because while this is a cross border trade it has nothing to do with passports.

For instance: if a German company wishes to raise finance in London, the London bank will arrange a loan itself or from a syndicate of banks in London under UK law. This type of business is global, predates the EU and does not require any EU authorisation. All that is required for this business to continue is for the EU to adhere to WTO rules on non-discrimination.

But, could the EU legislate to ensure that some business done in London has to be done in the EU? This threat has centred on rules regarding the clearing of securities denominated in Euros. Essentially, if a UK institution buys or sells a Eurozone instrument, say a bond, the back office clearing would, if some in the EU get their way, have to be done in the EU. This was a legal threat even while the UK was in the EU, but it is a potential threat to the UK outside the EU. Would the EU do it?

Firstly, if the EU did attempt to legislate in this way, it would not affect the profitable transactional business done in London, but the less profitable back office clearing – an important business, but not existential to London. Secondly, it would be illogical for the EU to do this; the expertise and staff are in London, thus creating disruption would increase costs for Euro-denominated securities. And it would be very difficult to do without imposing many levels of harsh protectionism on EU banks.

If much of the City’s business is unaffected by Brexit, there will remain some benefits to cross-border regulatory cooperation, but this does not have to be done in the context of a ‘deal’.

Mutual Recognition Agreements

The US trades with the EU under WTO terms, but that does not mean that the US has no agreements with the EU. The US, as with other non-EU states, has a mutual recognition agreement for goods standards to facilitate cross-border trade. EU/US Mutual recognition has now been extended to the insurance market, something that would interest the UK. This opens up a great opportunity for the UK and other non-EU states. While post-Brexit the UK will not be a party to the EU/US agreement, WTO rules work in our favour. Under GATS V11:2, the EU:

“…shall afford adequate opportunity for other interested Members to negotiate their accession to such an agreement or arrangement or to negotiate comparable ones with it.”

This means that the UK, could on Brexit, under the WTO, seek admittance to the mutual recognition agreement on insurance and all other agreements, giving it access to that aspect of the financial services regime. In short, the EU and UK can agree to cooperate on a mutual recognition basis – the principle has already been established.

Data agreements – an easily avoided cliff-edge

If Brexit need not present any problems to financial services, there is another area that does need careful thought: data. A technical but important subject that underpins how much of the e-commerce and other internet enabled business.

The EU’s current data regime is set by the 1995 Data Protection Directive, updated by the ePrivacy Directive (the Cookie Directive). This is due to be superseded next year by the EU’s General Data Protection Regulation (GDPR) – before Brexit.

Added to this new piece of regulation is the equally important EU/US agreement, the EU-US Privacy Shield that guarantees standards in the US. This makes it possible for EU companies to share data with the US – something vital to global data companies.

To enable UK firms to continue to pass data across borders, the UK will need to agree a data agreement with the EU, and its own version of the EU-US privacy shield. This is vital – but is a standard agreement.

When it comes to the EU, there are already a list of states that are judged by the EU to offer “adequate” protection of data. This includes the US, but also states such as Argentina, Canada, New Zealand and Israel. Given that the UK will already have implemented the GDPR pre-Brexit, and will transpose it into UK law via the Great Repeal Bill, there seems little to stop the UK being deemed adequate immediately. Given existing UK and US co-operation on data, the same goes for a new UK/US privacy shield. It needs to be done without delay, but presents no foreseeable issues.

The risks of staying in the EU?

While much of the debate over the next two years will be on the manner in which the UK transitions to its new post-Brexit state, it is worth remembering that staying in the EU is not the risk-free nirvana some now claim it to be. For financial services, the UK has over decades fought, with some success, a rearguard action to prevent the worst protectionist instincts of some EU states. This alarming trend, as set out here, included an onslaught of regulations unsuited to the UK that had to be routinely watered down or obstructed at the cost of UK political capital.

This ability to fight off bad regulations may not have continued indefinitely had Britain remained in the EU – and the cumulative effect of those that escaped were already taking a toll. While it was ironic and telling that David Cameron’s failed renegotiation coincided with a climate generally favourable to the UK, a renewed Eurozone crisis and prolonged slow growth could at any moment have led it into Eurozone policies not suited and indeed hostile to the City. While all along the Eurozone would have had its new Qualified Majority of the votes, something Cameron’s deal failed to prevent.

Set against the risk of staying in the EU, the UK is now well-placed to trade with the EU and globally under WTO rules, with or without a ‘deal’.