Rebecca Park is Director of External Affairs at UK Finance.
This weekend the International Trade Secretary, Liam Fox, wrote that “with resolve and imagination we can now help share a global trading environment fit for the 21st Century”. I couldn’t agree more.
As the UK looks at the kind of relationship we could have with the EU and with other key trading partners, we shouldn’t be guided by the limits of what has been done before, but by what we have the chance to build.
We are a strong service-based economy with the potential to shape new approaches to cross-border trade. UK Finance and its members believe that we should think outside the current frameworks, and start our negotiations with a genuinely ambitious proposal.
The integration of financial and other service markets across Europe has been one of the EU’s successes, making it cheaper and easier for businesses from manufacturing to tech to pharmaceuticals to raise money for investment. It also helps households get better returns for savings and investments. The financial services sector isn’t just successful in its own right; it is an enabler of other sectors. And it’s something the UK is good at.
Germany wouldn’t start a trade negotiation without a clear proposal for its automotive sector. Britain should feel the same about its financial services industry. Services are the lifeblood of the UK economy. Last year more than ten per cent of our total exports to the EU were made up financial services, standing at £29 billion: significantly more than the £18 billion we exported to the US and Canada.
As David Davis and Michel Barnier prepare for Phase Two of the negotiations their ambition should be to retain an integrated market in financial services between the UK and the EU, for the benefit of all our successful industries. Losing the ability to obtain banking services from the UK would limit the ability of businesses in the EU to obtain the funding they require for growth.
In short, we need to retain cross-border market access that enables banks and financial services providers in the UK to continue serving customers in the EU, and enables banks in the EU to continue serving customers in the UK.
It’s not politically feasible to maintain the status quo, or seek a special deal for financial services. But we can and should think about how to develop a meaningful financial services chapter within a UK-EU trade agreement to keep open cross-border trade in financial services.
Some worry about the impacts of tariffs, but for the UK’s most successful export sector this misses the point; cross-border trade is facilitated by open regulations which, if not secured in a new trade agreement, will halt the provision of some regulated services overnight. Put simply, you will still be able to purchase French wine and German vehicles – they may be cheaper or more expensive depending on tariff status – but the UK will no longer be able to provide a large number of high value services to customers within the EU.
Historically, coverage of services sectors in free trade agreements has been limited. However, there is nothing to prevent it happening now. The starting point between the UK and the EU is one of deep, integrated markets based on closely-aligned regulatory regimes and global standards. A framework for trade in banking and capital markets services, based on mutual recognition, provides for an ambitious and achievable model that would allow the EU and UK to maintain enough alignment between their regulatory practices for each side to accept the other’s authorisations, respecting that differences may exist.
This approach would be based not on EU-style “equivalence” but on the mutual recognition of the regulatory approaches of the two sides – grounded in the achievement of similar outputs and an appreciation of the strong regulatory standards of both the UK and the EU. This would need to be underpinned by a high degree of regulatory and supervisory co-operation, with our regulators and policymakers co-operating transparently on regulation and working together where necessary on supervision.
This isn’t to say that the UK would become a “rule taker” – but that there should be close collaboration and a mechanism to manage divergence and disputes, so that potential future divergence would be undertaken consciously.
Meaningful dispute mechanisms would protect businesses and consumers from the sudden withdrawal of market access rights in the event of regulatory divergence in two ways. First, by making such withdrawal subject to consultation. Second, by ensuring that rights can only be withdrawn over a timeframe that enables users to adapt.
There are many ways in which a such an agreement could be calibrated at a detailed level. While these details would be subjects for the negotiating table, ultimately, the final shape of an agreement will need to respect prudential and political prerogatives on both sides.
Most prospective trade partners start negotiations with very separate regulatory frameworks with limited histories of supervisory cooperation and limited appetite for maintaining convergence. This is not the case for the UK and the EU. While the challenges of constructing a basis for cross-border trade in mutual recognition, regulatory alignment and supervisory co-operation shouldn’t be underestimated, the EU and the UK are as well positioned as any two trading partners could be to attempt it.
Success would bring economic benefits to households and businesses across the UK and the EU. And there is appetite on the other side of the Channel. The EU’s Chief negotiator commented in March that “we agree with Theresa May when she recently called for a ’bold and ambitious free-trade agreement’”.
Let’s hope our politicians have the appetite to build on this with ambitious and creative proposals.