Theresa Villiers is a former Northern Ireland Secretary, and is MP for Chipping Barnet.
The City is one of our biggest exporters and our biggest sources of tax revenue. Jobs supported by the financial sector spread well beyond London to many towns and cities elsewhere in the UK, such as Belfast. Securing the position of the UK’s financial services sector should be a high priority in the forthcoming Brexit negotiation.
I spent six years as an MEP grappling with regulation of European capital markets. As the European Parliament’s Rapporteur, the negotiations for MIFID 1 consumed two years of my life and I well appreciate the complexities of the task ahead for our Brexit negotiators.
Whilst some in the City advocate the EEA/Norway model, we could not accept the unlimited free movement that would involve. EEA membership would also mean unqualified acceptance of single market legislation on which we would have no vote. Becoming a ‘rule-taker’ rather than a ‘rule-maker’ could harm our ability to regulate the City effectively and safeguard systemic stability.
So that points instead to a model based on a free trade agreement (FTA). Up to now, free trade agreements have never delivered the kind of access the City currently enjoys to EU markets.
A bespoke UK model, going well beyond what FTAs have thus far delivered for financial services would break new ground, but I believe it would be achievable. There has, after all, never been a situation like this, where two jurisdictions have heavily interconnected financial markets, large volumes of cross border trade, and virtually identical regulatory rules and systems.
We should also recognise that the UK’s exit deal does not need to deliver a uniform one-size-fits-all approach for every sector of the economy. If it secures market access, we should be prepared to consider committing to a greater degree of coordination and consistency between UK and EU financial services regulation than we could accept for other parts of the economy.
That would not be inconsistent with the vote to take back control over our laws. Efforts to secure international regulatory coordination and alignment have clear benefits in themselves, for example in helping us manage the kind of risks which led to the 2008 catastrophe. Moreover, some degree of alignment with the standards of the market to which you want to export is part of almost all trade agreements, especially in regulated goods and services.
Nor should we see passporting as lost cause. Ruling out the ‘cut-and-paste’ EEA model means retention of these rights in their current form will not be easy; but there is good reason to believe that we will be able to secure effective passporting-type rights.
We need, as recently advocated by the British Bankers’ Association, a uniquely ambitious bilateral agreement between the two sides, based not on a single rulebook, but on close alignment of standards, robust regulatory cooperation and a shared commitment to the highest standards in the world.
EU law already provides a precedent for access to EU markets for firms from third countries with ‘equivalent’ standards of regulation and supervision. The rights granted under equivalence rules have limitations – they cover only certain types of business, they confer only limited access, and, crucially, they can be withdrawn at very short notice if a regulator decides a third country’s rules are no longer equivalent – but they are an important starting point.
Mutual recognition arrangements could be agreed based on formal equivalence agreements between the UK and the EU or other forms of mutually agreed understanding that firms from each market will be held to similar high regulatory standards.
That does not mean transposing every EU rule. Mutual recognition arrangements can be based on less proscriptive arrangements.
What we need is a system which gives regulators on both sides confidence in the standards that govern and discipline the firms permitted to trade, from whichever the jurisdiction they operate.
A second element needed to make such an arrangement work would be a commitment on both sides not to withdraw these rights without warning, addressing a key weakness of existing equivalence provisions.
Maintaining passporting is an ambitious goal but there are some grounds for hope as we embark on our efforts to secure it.
Firstly, whatever the outcome of our exit negotiations, financial markets in the UK and the remaining EU will still be heavily interconnected. So decisions made in the UK on how we regulate the City will continue to have a significant impact on financial markets serving the whole of Europe. Reaching a sensible deal with the UK is the best way for EU regulators to retain influence over regulation of the City.
Secondly, the majority of EU Member States have no significant financial centre and no realistic chance of establishing one. They depend on London for much of the capital their businesses need. There is a real risk that attempts to prevent access to that capital or push up the costs of buying services from the City would damage their economies. They would have virtually no prospect of any replacement benefit at all because they have no financial centre which they hope might conceivably gain at the expense of London.
London’s scale and global reach gives businesses across the EU access to deep and liquid markets. It would be impossible to reproduce that anywhere else in Europe. Jeopardising it would cause economic damage across Europe, not just in the UK. An attempt to punish the UK by attacking London is much more likely to result in business lost to New York than to Paris, Dublin, Frankfurt or Luxembourg.
Transitional arrangements are the most pressing financial service issue facing our Brexit negotiating team. Achieving the deal we want is a complex task and will take time. In the meantime, obligations to manage risk could push firms to assume a negative outcome from the negotiations and act accordingly. Agreeing transitional arrangements at an early stage would help avoid the scenario where financial service providers are forced to take action now based on a worst case scenario because the time needed to change their business models and practices means they cannot wait for confirmation of what the final deal will look like.
While the path ahead contains hurdles, they are not insurmountable. There is every reason to expect that the City will continue to thrive in the post-Brexit era as the greatest financial centre in the world.
London genuinely is, and I believe will continue to be, a hugely important asset for the continent of Europe as a whole. It is in the interests of both the UK and the continuing 27 EU Member States to have an orderly transition to new arrangements for the thousands of businesses and millions of customers who currently benefit from financial services flowing between us.