The EU’s chief negotiator has softened his opposition to Theresa May’s post-Brexit plan for London’s financial services industry after UK negotiators acknowledged Brussels would have ultimate control over the City’s access to European markets.
London’s future as a global financial centre is tied to its ability to serve as a gateway to Europe for international banks, and UK negotiators had originally hoped they would be able to secure a special arrangement with Brussels to retain access even as Britain began to set up its own regulatory regime.
Michel Barnier had rejected the British prime minister’s new proposals, agreed with her cabinet earlier this month, because he believed she was suggesting an independent arbiter should decide whether UK regulations were sufficiently close to the EU’s to maintain market access — robbing the EU of its own “decision making autonomy”.
But last week, UK negotiators told Mr Barnier’s team that her proposed arbitration system would not cover financial services.
British officials insist the new guidance to Mr Barnier is not a change from the original plan, signed off by the cabinet at Chequers in early July, arguing Brussels had misinterpreted two different sections of Mrs May’s white paper.
But the acknowledgment also highlights that Britain is seeking a more orthodox relationship with the EU than some in the City and Bank of England advocated. Mrs May’s model would see London treated like New York, Singapore and other “third country” financial centres by Brussels, which must certify that rival regulatory systems have “equivalence” with the EU rule book.
London now accepts that Brussels can ultimately decide whether UK financial services rules are equivalent to its own, with no further right of appeal — a stance that in effect gives the EU veto power over some UK financial reforms if it wants to retain access to the European market.
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Two weeks ago, Mr Barnier told a private meeting of EU ministers that the arbitration system was a deal killer since in practice it would give Britain more influence over the European Commission’s equivalence decisions outside the union than it had as a member state.
But in the days after that session, the UK clarified that its proposals for overall governance arrangements, described in Chapter 4 of Mrs May’s white paper, were not intended to cover proposals on financial services, outlined in Chapter 1. No binding process of arbitration is included in the financial services plan.
Mr Barnier’s shift in outlook was signalled at a press conference with Dominic Raab, the UK Brexit secretary, last week.
“We . . . agreed that future market access will be governed by autonomous decisions on both sides,” Mr Barnier said. “We recognised the need for this autonomy, not only at the time of granting equivalence decisions, but also at the time of withdrawing such decisions.”
The City and British officials have long argued that an equivalence system — which is based on unilateral decisions rather than on bilateral treaty obligations — creates too much uncertainty since in theory EU decisions can be revoked with 30 days’ notice.
But even though the EU and UK positions on financial services are closer than before, many obstacles remain to a final agreement on a system for “equivalence” deals. These include mechanisms for co-ordinating rule changes, the strength of guarantees and conditions attached to equivalence agreements, and the breadth of market access.
The UK’s new position on financial services underlines the scale of the shift in Mrs May’s white paper. This dropped the UK’s original aim of securing a “mutual recognition” agreement with the EU to provide treaty guarantees on market access while still allowing both sides to develop different regulatory rule books.
The less ambitious “equivalence” model aims to build on and enhance the EU’s existing system, which gives limited market access to the US and Singapore where their rules have a similar outcome to EU standards.
One EU official acknowledged that Mr Barnier’s position had evolved on the UK proposals, but said the EU negotiator was still seeking more “reassurance” over the level of influence Britain expected over the evolution of rules.
Mr Raab noted that “specific arrangements” for financial services after Brexit needed to be “tailored to our close and interdependent relationship in this particular sector”. He added: “The commitment to open and fair trade must of course be met on both sides.”
Stephen Jones, chief executive of UK Finance, a lobby group for British lenders, urged negotiators to ensure that unilateral equivalence decisions still involved co-ordination to avoid problems and protect market stability.
“Such autonomous decisions taken to grant and withdraw market access should not prevent detailed advance consultation mechanisms between the parties being established,” he said. “This would enable proposed regulatory changes to be fully debated and understood by both parties in a measured manner.”
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