The City of London is facing fresh Brexit uncertainty after Brussels raised doubts over access to the EU market being granted by the end of the year for firms in any of the 26 areas of the financial services sector awaiting decisions.
Diplomats for the EU’s member states were told in a behind-doors meeting in Brussels that the failure of the British government to offer assurances over regulatory changes after 1 January was holding up the so-called “equivalence decisions”.
A European commission official said it was “unclear” whether it was in the EU’s interests to go any further in providing access to the European market for those working out of the UK given the uncertainty.
UK-based firms will lose automatic passporting rights at the end of the year which allow them to offer services across Europe. They will either need to establish bases in the EU or rely upon the European commission to unilaterally find UK regulations to be equivalent to the Brussels rulebook in order to continue to serve EU customers.
The commission has agreed time-limited equivalence for clearing houses and a decision was made in favour of continued access to the European market for UK-based central securities depositories on Wednesday due to concerns over Europe’s financial stability.
But Paulina Dejmek-Hack, a senior member of the EU negotiating team led by Michel Barnier, told diplomats on Thursday that the commission was unsure that any of the outstanding equivalence decisions could or should be made before the end of the transition period.
“That is unclear at this stage,” she said. “It is unclear what the UK sees as the way forward after 1 January. This is in essence the problem that dogs the entire equivalence process.”
The official said the commission was concerned not only by the government’s failure to provide assurances over the future regulatory outlook for the City of London but also at the new range of regulators that will be established.
“Each and every regulator will decide the policy and that will make the UK system more opaque and complex,” Dejmek-Hack said.
Last month the UK chancellor, Rishi Sunak, announced the government was taking “equivalence” decisions intended to ensure that EU-based exchanges, clearing houses, auditing and credit rating agencies could be used by British customers.
But Brussels has so far refused to reciprocate. Dejmek-Hack said the UK was also looking out for its interests as the government had not granted equivalence in the derivatives and investment funds sectors.
She also noted that the future of the City of London had not featured as a big theme in the Brexit negotiations over the past year. Equivalence decisions are unilateral and outside of the scope of the trade and security talks but it was expected to be raised by the UK given the financial sector’s importance to the British economy.
Lord Kerr of Kinlochard, a former head of the diplomatic service, said he was concerned that the British government had failed to protect the City of London, which is responsible for 10% of all tax receipts earned by the Treasury, while battling to increase fish catches for an industry which accounts for just 0.1% of the UK’s gross domestic product. “On financial services not being trusted means we’re getting virtually nothing,” he said.
Chris Chapman, a partner at international law firm Mayer Brown, said that even if equivalence was granted the EU’s ability to unilaterally revoke it would be used as leverage in the future.
“Although equivalence is often discussed as if it’s a right of access to the EU, that’s not the case – it is at the discretion of the EU,” he said. “Some commentators have described it as a protectionist mechanism. It’s part of a regime that can be used to stop or limit the ability of foreign firms to compete in the EU. That seems to be what we’re seeing now: it’s being used as leverage in negotiations, and it is becoming clear that it could also be used in the same way on an ongoing basis.”