EU Draws Brexit Battle Lines for Banks

Updated on
  • U.K. banks to lose passporting, EU market access after Brexit
  • End of transition period will probably coincide with EU budget

The Canary Wharf financial district in London.

Photographer: Simon Dawson/Bloomberg

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The U.K.’s breakthrough deal to get Brexit talks moving on to the future trading relationship may be short-lived.

That’s because the European Union negotiators preparing for the next stage of talks are drawing battle lines that will see them offer London’s financial services industry inferior access, if any at all, to the continent’s markets, once the post-Brexit transition period ends, according to EU and national government officials involved in the preparatory work.

The EU is set to reject calls for a “Canada Plus, Plus, Plus” arrangement that would include free movement of both goods and services, the officials said. And while some in the U.K. still hope to have a relationship that’s virtually identical to the one now, most in the bloc aren’t prepared to grant any rights to the U.K.’s financial giants other than allowing them establish a presence on EU soil -- under EU supervision.

The end of business as usual for the City of London could deal a blow to the U.K’s services-dependent economy, and to the continent, potentially increasing the cost of capital and fragmenting capital markets.

Brussels Summit

The U.K.’s best hope might lie in EU discord over the future relationship. Even as the consensus view is that a non-member should no longer enjoy the same benefits, differences are likely to emerge during the talks as countries like the Netherlands want to stick as close as possible to the status quo, while others, including France, insist on a clear separation.

The EU’s leaders are heading to Brussels on Thursday for a summit and on Friday will give a green light for talks on a transitional period once the U.K. exits in March 2019. Britain would then remain part of the single market subject to EU’s rules during a transition period that would probably end along with the current EU budget period on Dec. 31, 2020.

The bloc’s leaders will say on Friday that they will “calibrate” their approach to the future relationship in light of the decision to leave the single market and the customs union, according to a draft of their conclusions obtained by Bloomberg. They will also invite the U.K. to lay out its plans for the future status, before responding with their own position by March.

London-based banks have already started working on contingency plans, on the assumption that their current status will end. Banks will implement their relocation plans early next year to guarantee they’re able to have new offices inside the EU running by the time the U.K. exits, people with knowledge of the matter told Bloomberg last month.

The EU’s chief Brexit negotiator Michel Barnier has already said that London’s banks will lose their “passporting” rights to conduct business in the EU, and that the future agreement will be modeled after the free trade accord with Canada.

Equivalence Option

With passporting off the table, the U.K. may focus on securing a version of regulatory “equivalence,” or a formal recognition by the EU that the U.K.’s rules and oversight of specific businesses are as tough as its own.

The main difference between passporting and equivalence is that one is a right, the other a privilege. Equivalence can be withdrawn at short notice, would probably cover fewer services and may mean the U.K. will have to accept rules it has no say over.

European officials said equivalence is subject to continued U.K. alignment with EU rules and regulations, and any divergence could result into a withdrawal of its privileges. While regaining legislative sovereignty from the EU has been one of the main arguments of Brexit supporters, U.K. government officials have recently acknowledged that some alignment may be unavoidable.

The U.K. wants “a comprehensive free trade agreement, a customs agreement and all the associated regulatory alignment” with the EU, British Brexit Secretary David Davis told lawmakers in London last week.

— With assistance by Alexander Weber, Birgit Jennen, Helene Fouquet, Gavin Finch, and John Glover

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