May is now leaning toward an agreement for the U.K. that will be similar to so-called equivalence — existing arrangements the bloc has with other countries, based on maintaining similar regulations, according to the long-awaited White Paper on Brexit. As a result, U.K.-based banks would lose their unhindered access to EU markets.
“Today’s Brexit White Paper is a real blow,” Catherine McGuinness, the policy chairman for the City of London Corporation, which manages the British capital’s financial district, said in a statement. “With looser trade ties to Europe, the financial and related professional services sector will be less able to create jobs, generate tax and support growth.”
McGuinness said equivalence isn’t good enough and would need to be substantially enhanced. A key sticking point in the current equivalence setup is a potential worst-case scenario for the U.K.: the EU’s ability to unilaterally pull out of such an arrangement at short notice, undermining long-term planning for businesses.
Chancellor of the Exchequer Philip Hammond defended May’s plan late Thursday, saying it “can deliver a good deal” for the U.K. and its financial industry. He’s been one of the staunchest defenders in May’s cabinet of maintaining close ties with the EU after Brexit.
“Britain’s successful service sector — and our world-beating financial services industry in particular — has always been at the heart of our plan,” he wrote in an op-ed for the Financial Times. “I am resolute that we have to secure a deal that allows the sector to continue to flourish.”
Britain wants to expand the range of banking services covered by equivalence and have more input on the future shape of EU regulations. Indeed, the U.K. will have advantages over other countries while formulating a new arrangement with the EU, Hammond wrote. Both sides already have the same regulatory frameworks and stand to benefit from preserving financial-services relationships.
“Many of our EU partners understand this,” he wrote. “Some have been talking about enhancing the existing equivalence regime to provide a basis for future EU-U.K. financial services market access.”
There is no certainty that the EU will look favorably on any of May’s proposals, even if they are watered down from the previous stance. Until now, May had held out for an agreement based on “mutual recognition” of each other’s financial regulations, which would involve little or no disruption to the status quo. But the EU has said all along that was unacceptable due to the U.K.’s unwillingness to stick to the rules of the single market, and existing equivalence arrangements were all that was on offer.
“Having to comply with financial regulations we have no say over would be the worst possible scenario for our world-leading insurance sector, so we will look to the government to negotiate a better outcome than this,” said Huw Evans, the director general of the Association of British Insurers. “Whatever the final outcome, the insurance industry is too important to be a rule taker.”
The U.K. proposed that some processes “would be bilaterally agreed and treaty-based,” and “a structured consultative process of dialogue” between Britain and the EU would help maintain regulatory equivalence. The White Paper specifically criticized third-country equivalence regimes as lacking an official, bilateral “institutional dialogue.”
Under May’s plan, both sides would agree not to pursue divergent regulatory policies in relation to financial services and consult on each other’s proposals at an early stage. She also called for clear timelines and notice periods appropriate to the scale of the change, should either party want to withdraw equivalence.
With talks between the U.K. and EU stalled since March, global banks with European headquarters in London are rushing to establish new trading hubs elsewhere in the region, and have already started moving staff. EU regulators have made it clear they expect banks to establish full-scale, standalone operations inside the trading bloc as soon as possible.
The financial services industry contributed about 174 billion pounds ($230 billion) to the U.K. economy in 2016, or about 10 percent of the total, according to the lobby group TheCityUK. The sector employs about 2.3 million people, or 7.4 percent of the total working population.