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02 February 2017

The Brexit White Paper

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The UK Government released its White Paper on what it wants to achieve during the negotiations for exiting the European Union - Graham Bishop comments on the specific objectives for financial services.

No plan of operations extends with any certainty beyond the first contact with the main hostile force”:19th century German General von Moltke

Prime Minister May is already running into some uncertainties with her internal enemies that are causing her plans to fragment before any contact with the external enemy across the Channel: Giving Parliament a vote on Article 50; publishing a White Paper; giving Parliament a vote on the final deal, with perhaps more to come.

The White Paper does not seem to add anything to the 17th Jan Lancaster House speech – at least in the financial services sector.  My comments on that speech are here.

Financial Services warrant a whole page – see the Appendix below. The key negotiating aim is in 8.25.”Inour new strategic partnership agreement we will be aiming for the freest possible trade in financial services between the UK and EU Member States.” As the Government is now completely committed to leaving the Single Market, it can only lamely note that “there are provisions” about equivalence instead. But there is no detail about how to extend these concepts to provide general access.

Perhaps the key sector will be `clearing’ of derivatives – see my short-version paper here – but the Eurozone will be keenly interested in how any systemic instability can be avoided in a crisis. The answer seems to be to “establish strong cooperative oversight arrangements” with the EU. What does this actually mean in a crisis? Will the Eurozone be able to force changes in the operations of entities in the UK?  YES: this would maintain the power of the ECJ over Britain. NO: why will `they’ be willing to run any risk of massive liabilities falling on their taxpayers from derivatives that exceed 50 times the UK’s GDP?

“12. Delivering a smooth, orderly exit from the EU: Delivering a smooth, mutually beneficial exit will require a coherent and coordinated approach on both sides. We want to avoid a disruptive cliff-edge, and we should consider the need for phasing in any new arrangements we require [author emphasis] as the UK and the EU move towards a new partnership.”

The UK requirement for transitional measures has to be commercially attractive to UK-based firms and the repeated commitment to walk away from a “bad deal” would mean that all spending on such transitional arrangements risks being wasted. In any case, there is no detail on how these arrangement will be legislated. My papers above highlight the lengthy process from agreement in principle, Treaty ratification, amendment of existing legislative texts and finally their entry into force.  This process could readily last five years, so rather longer than the probable transition. This could easily be the moment when “the plan” comes into contact with the main hostile force: the EU27.

Appendix: Financial Services

8.22 The financial services sector is an important part of our economy. It is not just a London-based sector; for example, two thirds of financial and related professional services jobs are based outside the capital, including 156,700 in Scotland, 54,300 in Wales and 32,000 in Northern Ireland. The UK is a global leader in a range of activities, including complex insurance, wholesale markets and investment banking, the provision of market infrastructure, asset management and FinTech.

8.23 There are a range of provisions across many different pieces of EU financial regulation, which allow firms in Member States to provide financial services across the EU under a common set of rules and a single authorisation from their regulator – these are often referred to as financial services passports. Both UK and EU firms benefit from these arrangements – there are over 5,000 UK firms that utilise passports to provide services across the rest of the EU, but around 8,000 European firms that use passports to provide services into the UK.

8.24 Additionally, there are provisions that allow firms from ‘third countries’ to provide services across the EU, provided that their relevant domestic regulations have been deemed equivalent to those of the EU.

8.25 In our new strategic partnership agreement we will be aiming for the freest possible trade in financial services between the UK and EU Member States.

8.26 In highly integrated sectors such as financial services there will be a legitimate interest in mutual cooperation arrangements that recognise the interconnectedness of markets, as so clearly demonstrated by the financial crisis. Since that time, the EU has taken a number of steps to strengthen collective oversight of the sector. As the UK leaves the EU, we will seek to establish strong cooperative oversight arrangements with the EU and will continue to support and implement international standards to continue to safely serve the UK, European and global economy.


A European global financial centre

The financial services sector is an important part of the European economy, contributing significantly to the funding and growth of European business. It is in the interests of the UK and the EU that this should continue in order to avoid market fragmentation and the possible disruption or withdrawal of services. The UK’s financial services sector is a hub for money, trading and investment from all over the world and is one of only two global, full service financial centres – and the only one in Europe. In 2016 the Global Financial Centres Index once again ranked London as the number one financial centre. Citizens, businesses and public sector bodies across the continent rely on the City to access the services that they need. Over 75 per cent of the EU27’s capital market business is conducted through the UK. The UK industry manages £1.2 trillion of pension and other assets on behalf of European clients. The UK is also responsible for 37 per cent of all European Initial Public Offerings, while the UK receives more than one-third of all venture capital invested in the EU. EU27 firms also have an interest in continuing to serve UK customers. The fundamental strengths that underpin the UK financial services sector, such as our legal system, language and our world-class infrastructure will help to ensure that the UK remains a pre-eminent global financial centre.

© Graham Bishop

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