The report [...] finds that the third-country equivalence provisions in EU legislation are not a substitute for the passporting arrangements, which UK-based firms can currently use, as they are patchy and vulnerable to political influence. A priority for the Government in the negotiations should be to seek to bolster those provisions, should passporting not be an option. The Committee also concludes that the wider EU economy relies on the financial services currently provided in the UK, which may not be easily replicated elsewhere in the EU, and that, therefore, it would be in the EU’s interests to preserve access to its market for UK-based firms.
Commenting on the report, Baroness Falkner of Margravine, Chair of the EU Financial Affairs Sub-Committee, said:
"The Government has a lot of work to do. First of all, it must, early in the negotiation process, agree a transitional period so as to prevent UK based financial services firms from restructuring or relocating on the basis of a 'worst-case' scenario. Last week, France's leading financial regulator told the BBC that some major banks are in the advanced stages of planning to shift some operations from London to Paris.
"Second, it should go into negotiations with the strongest possible evidence base. It needs to determine as precisely as possible which firms currently rely on passporting and the degree to which equivalence provisions might provide a substitute. We found those provisions to be patchy, unreliable and vulnerable to political influence: the Government should seek to bolster them wherever possible.
"The EU should also carefully consider the findings of this report. EU firms rely on the services provided in the UK, and pain caused to the UK's financial sector will not be the EU's gain, but New York’s." "We are in danger of a lose-lose scenario if pragmatism does not prevail".
London is the world's leading financial services centre, it is closely followed by New York. Other European cities are far behind. Any attempt to unpick London's highly developed financial services ecosystem could result in much of the business lost by the UK relocating to New York or other financial centres outside the EU, rather than the EU.
There is a chance that the UK will lose the ability to clear euro-denominated transactions following Brexit. But it is unlikely that relocation of the business to the Eurozone would provide the benefits to the wider EU economy currently provided by clearing in the UK. New York could provide such benefits, but if the business moved there, the EU would not benefit from repatriating the business.
Some firms do not themselves appear to be aware of their reliance on current passporting arrangements. It would be in the interest of the firms themselves, as well as in the national interest, if they were to work with the Government and regulators to determine the true extent of such reliance.
The UK financial sector employs 1.1 million people, of whom around 60,000 are EU nationals and 100,000 non-EU nationals. The ability to access highly-qualified staff and easily transfer them between the UK and the EU is a key issue for the financial services industry. This is even more important for the FinTech sector, which relies heavily on talent, including entrepreneurial talent, from overseas.
Report: Brexit: financial services
© House of Lords
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