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24 May 2016

12th Brussels for Brunch: A month to the Brexit Referendum

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With the Referendum imminent, this blog covers some of the main Brexit topics discussed, as well as summarising key regulatory events since the last Brussels for Breakfast.

By Graham Bishop/Paula Martin
  • Brussels for Breakfast organised by the Centre for the Study of Financial Innovation (CSFI), with Graham Bishop, Wes Himes (Instinctif Partners) and Peter Snowdon (Norton Rose Fulbright).
  • Brussels for Brunch webcast with George Littlejohn (CISI)

For CPD access click here (subscription required) 

Brexit implications

State of the Polls

The Poll of Polls has showed a sharp movement towards voting to Remain in the last two weeks and the latest six polls show an average of 54% Remain versus 46% Leave.

Type of trade deal: to EEA or Not? Passporting versus Equivalence

EU Commissioner for Financial Services Hill gave a speech at the London School of Economics in which he criticised the Leave campaigns’ change of attitudes towards the Single Market. He elaborated on some of the most damaging implications for the City. “Let me explain in a little further detail. I've talked about the crucial importance of passporting for Britain's financial services industry. Passporting is only available to countries inside the Single Market.

If you're not in the Single Market you can, in some cases seek equivalence, whereby the EU deems your national standards to be as good as the EU's.  Equivalence lets a company provide services into the EU but, unlike passporting, it doesn't let you set yourself up in the European market. To do that, you would have to set up a separate subsidiary with its own capital requirements, subject to EU and any additional national rules. That is neither cheap nor simple.

Now, getting agreement on equivalence isn't easy either. Negotiations take time. A couple of months ago I reached an agreement with the United States on equivalence negotiations on central counterparties – CCPs or clearing houses. That negotiation on that one narrow issue took four years, even though there was good will on both sides and both I and my counterpart wanted to do a deal quickly.

And so: if you don't have passporting; if you haven't yet or aren't able to negotiate equivalence; then you're left subject to “third country” rules.  You can only do business with an EU country if its regulator and supervisors agree and you're subject to their rules, and you could have to do that individually for each EU Member State you want to do business in, so no cross border rights. And, of course, you might not enjoy all the protections of EU law against discrimination based on where a business is from.”


Pro Brexit: Economists for Brexit

“The Economists for Brexit is a group of eight independent, leading economists who are convinced of the strong economic case for leaving the EU. To date, debate on the economic merits of whether the UK should remain in the EU has become overwhelmed by the Government's Project Fear campaign. Each of the eight economists have become exasperated by the scaremongering and often economic illiteracy of this campaign. 

At the same time, the group believes that whilst there are a substantial number of economic arguments to support Brexit, they are yet to be made in public. The purpose of this group is to explain the very clear economic arguments in favour of Brexit, offering voters - who are crying out for clarity on the economics of Brexit facts based on proven economic models, as opposed to speculation. 

  • The UK does not need to do a trade deal to trade. It already trades extensively with many countries across the globe under the rules of the WTO and can continue to do so with EU countries in the future (in the same way that the US, Japan and China does). Leaving the EU will decrease prices and boost GDP.
  • The City of London will retain its role as the world’s leading financial centre outside of the EU.”

Pro Remain: HMT x 2; IMF; OECD; NIER; CER

HM Treasury analysis on the long-term economic impact of EU membership showed that a 23rd June vote to leave the European Union would mean that Britain would be permanently poorer, with figures such as £4,300 a year loss for every British household or an economy between 3 and 7% smaller by 2030 if case Britain left - compared to remaining in the EU. Bruegel published an assessment of the document. The OECD underpinned those results, saying that Brexit would impose a heavy ‘tax’ on Britons for many years.

Several British and global economic institutions expressed their concerns about the uncertainty that a vote to leave would cast over the banking and financial systems, with the ECB asking large eurozone banks to detail how they are preparing for a Brexit. The NIESR warned of the ‘shock’ that would hit UK’s economy in case of a negative vote on EU membership: British GDP would be between 1.5% and 7.8% smaller by 2030, compared to staying in the EU.

The Centre for European Reform published its final report on the economic consequences of leaving the EU, in which the CER Commission concluded that “the high degree of economic integration between the UK and the EU will always require some system of shared governance.” This statement was shared by the City of London’s Boleat, who wrote that regulation would have to exist whether Britain was in the EU or out of it, and that “too often it’s the UK – not Brussels – to blame for the costly burden of regulation.” Martin Wolf argued in the FT that “arguments for Brexit do not add up,”examining the popular arguments in favour of UK’s departure.

Parliamentary reports

The House of Commons Foreign Affairs Committee reached agreementon their referendum analysis, highlighting the major issues voters need to know to decide their vote while the Lords’ EU Committee clearly opposed a vote against EU membership, stating in their report that “EU withdrawal would be complex and daunting.” The House of Lords also produced a report on the completion of Economic and Monetary Union in the UK in which it acknowledged that the 2025 target to complete EMU was unlikely.

TFEU Article 50: how will it be implemented?

The exact process created heated discussion with two views: On the one hand, it would be in the UK’s interest to delay serving notice. On the other hand, the rest of the EU might be anxious to resolve the issue quickly. Reuters reported a clear view in Brussels: “EU would divorce UK before any new relationship." The European Union would insist on completing a swift divorce with Britain before starting to forge any new relationship if UK voters decide in June to leave the 28-member bloc, EU sources told Reuters.

Two EU sources familiar with the bloc's latest thinking on a possible Brexit told Reuters on Thursday there was no appetite to grant any extension of the two years provided by the EU's Lisbon Treaty for negotiating a withdrawal, while any new trade partnership would take many more years to conclude.

The stark view from Brussels means Britain could initially be cut adrift without any preferential relationship with its biggest trade partner. It contrasts with suggestions by "Leave" campaigners that London could secure a special status preserving market access before it formally leaves the EU. [...]

However in case of a "Leave" vote, the European Commission has tentative plans to hold a rare Sunday meeting on June 26 to set its strategy, one source told Reuters.

EU leaders would hold a brief summit with Britain two days later, at which London would be expected to give formal notice to quit. The 27 other states would then meet without British representatives to decide how to conduct the withdrawal negotiations and take the union forward, based on proposals from the executive Commission.”

EU Financial Regulation

The European Commission published the first Capital Markets Union status report, in which it takes stock of the six months since the adoption of the CMU Action Plan. Measures since the agreement on the restart of securitisation markets in Europe or the proposal for simplifying prospectus requirements are among the most relevant. One of the priorities of the CMU is a stronger European personal pensions market, as has been remarked by Commissioner Hill: a standardised Pan-European Personal Pension product is much closer now after EIOPA published its final report on the public consultation on PEPP- the document recognises that this product has the potential to promote a Single Market for personal pensions while facilitating the CMU. Payments are also moving towards pan-European patterns: the EPC launched the public consultation on the SEPA Instant Credit Transfer scheme which will provide customers with euro instant credit transfers.

The 2016 edition of the ECB’s report on Financial Integration in Europe highlighted that the CMU will help boost financial integration.

Commissioner for Financial Services Jonathan Hill commented on the feedback the Commission has received on the overhaul of the EU financial regulatory framework at the hearing on the ‘Call for Evidence’. The Basel Committee released its tenth progress report on adoption of the Basel III standards – VoxEU examined the risk of double-bank runs, liquidity risk management by banks and the implications for the regulation of the financial sector. The British Bankers’ Association issued an article aiming at helping banks on the application of the BCBS’ Fundamental Review of the Trading Book.

ESMA published its response to the Commission’s Green Paper on Retail Financial Services; called for the creation of an EU-wide framework to allow asset managers to start direct lending; published its Opinion on EU framework for loan origination by investment funds and commented on the result of EU-wide stress tests for CCPs.

The Eurogroup agreed a number of core common principles that could serve as guidance to improve national insolvency frameworks – Graham Bishop wrote about this in the Financial World’s magazine: “Insolvency reform: is it still the really high-hanging fruit?.”

The EBF commented on EU TLAC implementation and MREL review, while the EBA's Andrea Enria gave a progress report on the Banking Authority efforts to push for more transparency and disclosure in the European banking system. The ECB's Benoît Coeuré analysed the impact of recent policy interventions on market functioning, saying that regulators, issuers and investors want markets to be able to absorb debt without large dislocations and price formation to be orderly and transparent, and that is the direction the European Central Bank is pursuing with its latest measures. The Commission issued its country-specific recommendations included in the European Semester package and said that more is needed to consolidate Europe's recovery.

On insurance, EIOPA launched a consultation on treatment of infrastructure corporates under Solvency II, whereas Insurance Europe explained why the final draft PRIIPs rules would mislead consumers about insurance-based investment products.

© Graham Bishop

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