The Financial Times obtained access to a European Commission document that puts paid to a pet proposal for how the City could have its cake and eat it too in a Brexit, that of the implementation of an “equivalence” regime. We had been skeptical that this arrangement would be approved by the European side. Our view appears to be correct.
While this had not been fleshed out in any detail, the UK proponents argued that London could be permitted to service customers on the Continent more or less as before if UK regulations were deemed to be “equivalent,” since the EU had already allowed for that with some financial services.
The idea had been bandied about before, with a recent sighting in January. Then, an “influential” banking industry lobbying group, TheCityUK, published its demands for Brexit talks. We wrote at the time that they showed how the British side was in a bubble, and that the document pressed for several ideas that had already been rejected by the EU.
The only good thing that could be said about equivalence was that it at least had not been previously nixed. The equivalence proposal resulted from the fact that the industry did recognize that one of its pet asks, “passporting,” was a non-starter. Passporting would have allowed UK-based employees of UK firms to sell services to customers in the EU. It’s not hard to imagine why the EU would not be keen about that in a post-Brexit world.
Some detail from the Financial Times in January:
The City of London has retreated from demanding continued access to the single market in any post-Brexit deal with the EU, according to its principal lobbying group.
In a list setting out its priorities for the forthcoming EU negotiations that was published on Thursday, TheCityUK abandoned the idea of fighting to retain the financial “passport”, which allows companies to sell their services throughout the single market from a single location.
Previously its desired outcome was for the UK either to remain in the EU’s single market, or to strike a special agreement preserving existing passporting rights. But Theresa May’s administration has shown little interest in pursuing such a deal.
TheCityUK is now pinning its hopes on building a deal around “equivalence”, a relatively new legal concept embedded in some but not all EU financial regulation.
This allows companies from markets that are deemed to have “equivalent” regulatory standards to trade freely across borders with each others’ customers under their home country’s laws and regulations.
Miles Celic, the group’s new chief executive, said that a “bespoke deal” tailored to the needs of the UK should be achievable. “It would protect London as a market and those European customers using it,” he said. “That’s an advantage not only for the UK, but for the EU too.”
And as we remarked in our post then:
Yves here. Recall we had said passporting would never happen because the EU would not grant it.
There are two astonishing assumptions in this little spiel, one explicit, one implicit.
The first is the idea that the EU is on board with preserving the City of London. Huh? All advanced economies regard promoting their banks as a strategic priority. The Continent would love nothing better than to take a piece out of the City. It means more jobs, not just banking but new office construction, and relocation of the related support professionals, like lawyers and accountants…
The implicit assumption in the banking lobbyist thinking is that the EU and UK could agree on an equivalence deal when the EU doesn’t have all its financial service regs on that basis. The Financial Times article mentions that commercial lending and insurance are not covered, for instance. Moreover, this would be tantamount to the UK giving up sovereignity, since the EU retains the upper hand. The EU can withdraw the right to operate under equivalence rules with a mere month’s notice if they deem the other country’s regs to be not equivalent. Bank of England governor Mark Carney is making less than happy noises about the idea because it could result in, per the Financial Times, “Britain losing influence and even control over its own markets.”
So what is the lobbyist” proposal? Again from the pink paper:
TheCityUK argues that issue can be dealt with by the UK negotiating a long term deal that would establish the principles on which equivalence was founded and also creating a mechanism to resolve disputes.
This is tantamount to asking the EU to overturn its legal system to accommodate British bankers. Na ga happen.
The EU is a civil law system. Rules and regulations are set forth in great detail. Judges will interpret them but in theory, their rulings don’t have precedential value (in practice they do but not remotely to the degree they do in the Anglo common law system). The idea of having only some rough and ready guidelines and winging it is not even remotely how the EU does things. We’ve commented repeatedly that Eurocrats are rigid, literal-minded, and procedural. That’s actually served as a plus for them since it produces the predictability they’ve needed to keep a now 27 member nation group functioning at all.
Back to the present post. Here is the Financial Times’ sneak update on equivalence:
The City of London’s hopes of maximising access to the EU are set to be dealt a blow by European Commission plans to take a tough stance on rules that could provide a post-Brexit lifeline for the UK financial sector…..
Instead, many are looking to take advantage of the EU’s equivalence provisions, which make it simpler for foreign institutions to do business with Europe, as long as Brussels trusts their home countries have similar standards of oversight….
But the commission’s “staff working document” emphasises Brussels’ determination to carry out “continuous follow-up monitoring” to make sure countries deemed equivalent still meet the criteria. It also stresses the commission’s power to withdraw the status at any time in light of “contrary developments”.
Brexit supporters argue that the UK could disentangle itself from the EU’s financial rules while still benefiting from market access. But the document makes clear that one of the commission’s prime concerns is to make sure that no country can get or keep equivalence if it conducts a regulatory bonfire or retreats to light-touch supervision….
The document argues that the EU should set “sufficiently robust prerequisites”, or conditions, before it grants equivalence, including the “on-site” inspections of overseas firms operating in Europe and “effective access to data”…
The EU official cautioned that equivalence remained “very much case-by-case. One sector doesn’t set a precedent for another, one country doesn’t set a precedent for another”.
What the UK seems unwilling to understand is that the EU has no reason to be nice. Its politicians are responsible to its people. The Brits harbor the fantasy that a vigorous City of London is somehow good for the Continent when more and more studies have ascertained that advanced economies have financial sectors that are overly large and are hindering rather than helping growth.
So to the extent that Europeans are going to be subject to the unduly costly ministrations of bankers, it might as well be their bankers in their countries, since they get the ancillary benefit of having them rent office space, pay local taxes, dine in local restaurants, and support the jobs of other service professionals like lawyers and accountants.
Yet if you read the comments on this article, you’ll see a large cohort lecturing the EU that they are making a big mistake in dissing the UK and they will come to regret having to deal with pricier and inferior financial services. Really? Even if the Eurobanks wind up offering pricier wares, that means clients will consume them less….which is a desirable outcome, given the desirability of shrining an oversized and too often predatory financial services industry.
But the hubris of the Brits who believe they have a policy say in Brexit continues unabated. They are in store for a rude awakening.