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U.K. Faces a Brexit War on Four Fronts

The House of Lords, financial services, Scottish independence and the cost of exit will conspire to bring Brexit to the fore.

March is likely to see at least four key Brexit battles, whose outcome will frame the next two years of negotiations as Britain and the remaining 27 EU members wrangle over their future relationship. Here's the rundown:


Prime Minister Theresa May would undoubtedly prefer Brexit to be under way by March 25, when the remaining members of the bloc will celebrate the 60th anniversary of the Treaty of Rome which started the process of European integration. Dissident lawmakers in the House of Lords, however, are threatening to attach amendments to the current withdrawal bill and that could drag on for long enough to threaten the timetable.

Michael Heseltine, a former deputy prime minister for the Conservative Party, wants an amendment that demands Parliament gets a final vote on whatever deal is reached during the negotiations. Writing in the Mail on Sunday newspaper, here's what Heseltine had to say about the government's authority to quit the EU that derives from the June referendum:    

Should that authority have any time limit or be in any way influenced by the outcome of the unpredictable negotiations? Both questions demand an affirmative answer for me.

While the House of Commons has the ultimate authority, the House of Lords, where Heseltine now sits, can certainly cause enough mischief to delay the process as it debates the bill this week. The Labour Party, while promising not to derail the process, reckons it can get support in the Lords for a guarantee that EU citizens will be able to remain in the U.K. after it leaves the bloc. May's government is likely to return to the House of Commons to vote to undo such an attachment.

QuickTake A Post-Brexit Trade Deal

And, who knows, members of Parliament might decide they quite like the amendments proposed by their unelected peers, even though they passed the bill unadorned in its first passage through their chamber. With former Prime Ministers John Major and Tony Blair both making recent speeches calling for those opposed to Brexit to make their objections known, there's a slim chance that MPs could be emboldened.


Earlier this year, the U.K. banking community gave up on the idea of retaining the so-called passporting regime that allows 5,500 financial firms based in the U.K. to sell services across the bloc. Instead, its hopes lie with an inferior arrangement called equivalence, designed to allow countries whose laws and regulatory authorities are deemed sufficiently robust to trade financial services with EU members.

But equivalence is a poor cousin of passporting; the rules were not designed to cope with a huge financial center operating on the EU's doorstep, and would need to be revised to cope with the new reality. As Bloomberg Intelligence notes in a report on the subject, it doesn't provide market access for "banking services such as lending and deposit-taking, retail asset management or payment services. Equivalence offers less-extensive rights and protections, and the process is often laborious, time-consuming and vulnerable to political persuasion."

And politics is likely to play a big role in limiting how much latitude the EU gives to the U.K. financial sector. The Financial Times on Sunday said it had obtained an EU document proposing to tighten up the equivalence rules, including "continuous follow-up monitoring" of the regime, "on-site" inspections of firms including "effective access" to their data and the right to withdraw the status in the event of "contrary developments."

Paris, Luxembourg, Germany and Dublin are actively bidding to take business away from London. Once May triggers Article 50, moves to circumscribe the boundaries of trading and settlement of euro-denominated securities so that they only happen inside the euro zone will rapidly accelerate. Those banks that have been debating leaving the U.K. are likely to start implementing their relocation plans. If that happens, the impact won't just be felt in the city itself; about two-thirds of the country's 2.2 million finance workers are located outside of the capital, and more than half of the 176 billion pounds ($219 billion) that the industry contributes to the economy comes from outside London.


It's not just in the corridors of Brussels that May faces political fights. At home, she's bracing for Scotland's First Minister Nicola Sturgeon to call a second referendum on independence. That call would coincide with the formal notification of leaving the EU, the Times newspaper said.

While most polls have shown Scots still opposed to leaving, by the same 45-to-55 percent margin that prevailed in the 2014 plebiscite, a BMG survey for the Herald newspaper published on Feb. 8 showed that margin narrowing; with just 51 percent in favor of staying within the U.K. and 49 percent wanting to leave. The fact that 62 percent of Scotland voted to remain in the EU gives Sturgeon ammunition.

The Scottish Parliament earlier this month voted by 90 to 34 against triggering Article 50, with Sturgeon leading the opposition against what she called "the catastrophic hard Brexit now being pursued." A referendum on Scottish independence, though, is in May's gift rather than being Sturgeon's right; the Prime Minister's reluctance to accede to a plebiscite risks sparking a domestic political fight.


Last week, Austrian Chancellor Christian Kern became the first EU leader to publicly identify how big the bill will be for leaving the bloc. "The check should be around 60 billion euros, that’s what the European Commission has calculated and this will be part of the negotiations," Kern told Bloomberg Television in an interview. The cost includes past and existing pledges to the EU budget and projects, as well as pension obligations to civil servants.

U.K. Trade Secretary Liam Fox has dismissed the charge as "absurd," while former cabinet minister Iain Duncan Smith called it "a nonsense that's been conjured up by EU officials who are behaving like children."

Nevertheless, Michel Barnier, the EU's chief Brexit negotiator, is likely to present May with that bill as the first order of business once she's formally notified the bloc. Barnier can try to hold discussions over the rest of the Brexit agenda hostage to Britain agreeing to settle its exit bill.

So far, Brexit has been more a mantra, and a symbol of a movement, than a reality. That's about to change.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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