By Victoria Adams, Director, Public Affairs
The General Election is underway and, if the polls are to be believed, Boris Johnson will return to the House of Commons with a Conservative majority. His first act will be to have a renewed attempt at hauling the Withdrawal Bill through Parliament, this time backed by a democratic mandate.
Believe it or not, the passage of the Withdrawal Bill actually represents the easy stage of Brexit. The most difficult debate is set to follow with the trade agreement talks, and Boris Johnson has set himself a remarkably ambitious timetable of getting a trade agreement wrapped up in just one year.
One of the most contentious and certainly most important will be the discussions surrounding the equivalence regime that will determine the level of access granted to UK financial services in to the EU market.
With 1.2m jobs and around £29bn in tax revenues generated by financial services, it’ll be critical for the UK’s ambitious spending plans to ensure that the golden goose continues to lay eggs by being able to access EU markets on favourable terms.
However, the complexities of regulatory equivalence, as set out in broad terms in the Political Declaration, will run up against the demands to ‘take back control’ – particularly when it comes to the UK’s ability to wrap up alternative, new trade deals with major markets such as the United States.
In essence, the UK will likely be able to benefit from continued access in quite a broad range of services at first. Although less comprehensive than the current passporting regime, the fact that the UK is approaching trade talks from a position of having adopted the EU rules in full (and actually, having written a large portion of the financial services regulations) will mean that granting equivalence could initially be fairly straightforward. Indeed, equivalence has been granted to other states for financial services in the past.
The UK will need to hope that the EU goes further than it has in existing equivalence arrangements and allows UK financial services firms to operate in deposit taking, lending, payment services, mortgage lending and insurance mediation and distribution on an equivalence basis. But this is where the sovereignty versus economic reward trade-off will begin.
The aforementioned areas will require an ‘Equivalence Plus’ arrangement, owing to the fact that they are among the most systemically risk prone areas that can place tremendous liabilities on both central banks and ultimately governments. If the UK wants to be adopt an ‘Equivalence Plus’ arrangement, it will have to very quickly decide if it is prepared to sign up to enhanced European regulatory scrutiny and presumably commit to making continued contributions to an EU bailout mechanism when financial crises occur.
Even by adopting the existing equivalency agreements, the UK will essentially be signing up to adopt EU legislation in full as a rule taker. The EU will have the power to remove access to UK financial services firms within as little as thirty days if the UK deviates from EU rules, as it recently did with Argentina, Australia, Brazil, Canada and Singapore – and when it removed recognition of credit ratings agencies from those countries claiming they were not regulated to EU standards.
The alternative, which has often been cited by many of the people who campaigned for Brexit will be to pursue a course of deregulation across the City. However, this will be at odds with continued deep access to the European markets. The long term opportunity from deregulation may be a real one, but it would be likely to come at a high price in the short term if the UK was no longer deemed to be an equivalent jurisdiction that adopted the same standards as the EU.
It remains to be seen who will prevail in the ensuring debates, but the decisions taken around the future trading relationship with respect to financial services will be telling about how deep our relationship with the EU will be. Will it be a closely aligned relationship but at the expense of some sovereignty, or will it be more akin to a break up in pursuit of full sovereignty? Only time will tell. One thing is certain though – the battle has only begun if and when the Withdrawal Agreement passes.