Financial services risks becoming Brexit's orphaned child
Boris Johnson was elected last year with a clear mandate to get Brexit done and he delivered by taking Britain out of the EU on 31st January 2020. All that is left is to arrange Britain and the EU’s future relationship.
After 47 years of membership in the single market getting our new house in order is no small matter - particularly against the new year's eve deadline, when the current transition period will end and Britain will become a third country with no access to the EU market.
While the EU has always thought Britain would value access to the single market, even if that meant continuing to adhere to EU rules, the UK has declared that it is ready to forego such access if it can "take back control" of its regulatory independence. But more than four years after the referendum, the UK government still hasn't made up its mind on which of these two versions of Brexit to pursue.
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And then there is the trust deficit. This predates the controversial Internal Market Bill, with its extraordinary recantation of terms agreed under the Withdrawal Agreement, but this growing lack of trust threatens important bridges remaining between the City of London and the EU Single Market.
Some may argue that the financial services sector is unlikely to care about the Brexit negotiations. It has never been the ambition on either side to make financial services a subject of the discussions as the sector would not be covered whatever the outcome. They are separate things.
This reality has essentially forced asset managers, banks, insurers and other financial institutions to prepare for a no-deal Brexit, by transferring activities to existing entities, or to entities that have been hastily established as Brexit contingency operations in various EU financial centres, enabling them to continue serving clients. Many of these firms maintained the hope that such transfers could be kept to a minimum.
But this is where the souring of the negotiating atmosphere really hits home for financial services.
The EU Commission has made it abundantly clear that relations between the EU and a third country in financial services are governed by the different equivalence regimes foreseen in EU legislation. For financial institutions, equivalences would certainly be a welcome instrument, as their various finalities bring multiple advantages to firms, whether based in the UK or in the EU.
The process of assessing a country's equivalence, made unilaterally by the Commission, is normally of a technical nature and not affected by other elements in a bilateral relationship. However, recently, the Commission has taken a more circumspect, some might say political, view of events.
In the case of the EU-UK discussions, it is clear that progress on equivalence assessments has been inversely proportionate to the souring of the overall mood, and to the lack of discernible progress in the ongoing negotiations on the future relationship. The two subjects are indeed separate but also intimately linked.
The hopes of those businesses planning only contingency operations are now also being dashed by recent reminders from the European Central Bank and European Securities and Markets Authority of the need to beef up their teams in the EU. Indeed, the EU financial services authorities are not subtle in reminding firms that after the end of the transition period, EU operations will have to be conducted by EU based teams.
Even if the EU is sticking to the letter of the law by advising firms in this way, how its institutions go about it lays bare the deepening rift between the two negotiating sides. They are also shining a bright light on how financial services will operate across the Channel in the future if this situation is not addressed.
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There is now a distinct risk that the critical financial sector becomes an unwitting orphan of the Brexit process, for both EU and UK.
The next manifestation of this souring environment will be a renewed attempt to curtail the possibility of delegating certain functions from the EU to a third country such as Britain. This has worked for decades without causing problems with third countries, and yet it seems to be a source of real concern in the run-up to the new paradigm for EU-UK relations.
While leaving the EU will undoubtedly have consequences in terms of market access, no one can deny the obvious truth that London will remain, for the foreseeable future at least, a global financial centre; and one with a major repository of knowledge and expertise in Europe. The sensible thing would be to maintain a regular dialogue on various cross border issues and challenges - on developing taxonomy for responsible funds or climate change for example - instead of cutting ties altogether.
Hopefully the remaining weeks will be used to mend fences, and progress on the overall future relationship will also allow goodwill to return into the financial services realm.
Industry representatives on both sides of the Channel should speak out, in one clear voice, to encourage their leaders to be bold in devising a sound and mutually beneficial future relationship. The time to do this is now. The pandemic has thrown us all into one boat. We should stop arguing, see the bigger picture and start rowing. Unless of course, to briefly borrow from Boris Johnson in 2016, we want Brexit to become a "titanic success".
Nicolas Mackel is CEO of Luxembourg for Finance
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