Dominic Raab dismisses EU threat to City of London
Brexit negotiations with the EU started up again in January, with talks on financial services. After months of wrangling, new rules for trade were finally agreed on Christmas Eve, just days before the year-end deadline. But in a document spanning over 1,200 pages, there was very little mention of financial services: a sector that accounts for seven percent of the UK’s economy and 10 percent of its tax receipts.
Prime Minister Boris Johnson himself admitted the trade deal struck with the EU had failed to meet his ambitions on financial services.
The two sides hope there will be a “memorandum of understanding” in place by the end of March – but it is expected that these talks will only produce an agreement to consult each other before making regulatory decisions.
The City of London’s most influential lobby group CityUK is urging Brussels to grant regulatory equivalence to the sector, as it is “in the interests of customers and clients in the EU”.
The group also called for the memorandum of understanding talks to create “regular structured dialogue, including transparency, clarity and certainty on the unilateral processes of adoption, suspension and withdrawal of equivalence decisions”.
In a recent report, economist Catherine McBride argued that while many outside the financial services industry may assume that regulatory equivalence means “the same in substance or quantity”, it is now becoming extremely clear that for Brussels “equivalence” is simply a matter of political expediency.
She explained: “For the UK presently has not only equal, but identical, financial regulations to the European Union. The Commission claims that equivalence has been withheld because the UK could change its regulations in the future.
“However, the Commission could withdraw equivalence with only 30 days’ notice, so this is hardly a rational excuse.
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City of London
“In reality, the Commission has refused to grant trading platforms located in the UK equivalence to trade euro denominated EU shares with the aim of forcing businesses to relocate from London.
“This makes a mockery of EU claims about level playing fields and seems to breach the World Trade Organisation (WTO)’s most-favoured-nation rules.”
The most-favoured-nation (MFN) principle is a cornerstone of the multilateral trading system conceived after World War 2.
It seeks to replace the frictions and distortions of power-based (bilateral) policies with the guarantees of a rules-based framework where trading rights do not depend on the individual participants’ economic or political clout.
Rather, the best access conditions that have been conceded to one country must automatically be extended to all other participants in the system.
This allows everybody to benefit, without additional negotiating effort, from concessions that may have been agreed between large trading partners with much negotiating leverage.
Ms McBride argued the City of London now needs to rediscover its innovative spirit and distance itself from Brussels.
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Prime Minister Boris Johnson
She wrote: “Just as it invented the Eurodollar market in the Seventies, maybe now it is time to develop an offshore Euro market. The EU, and the French in particular, have made no secret of their desire to smother the UK in red tape to prevent it becoming ‘Singapore-on-Thames’.
“Simple business logic suggests that the best way to forge a successful future is to make the EU’s nightmare come true.
“So, not only should the UK not align its regulations with the EU, it should be actively jettisoning EU regulations that don’t suit it.”
According to the economist, the first EU regulation to go should be MiFID II’s Double Volume Caps, which limits the amount of trade that can happen each year outside of the public exchanges.
She noted: “This rule has hurt UK trading more than any other EU country because the UK has a larger and more heavily traded listed capital market than any other EU country. The very idea that you could have a one-size-fits-all limit across 28 differently sized markets, with different attitudes to share trading and listed companies, was always nonsense.
“But as the UK had assets under management worth over $12trillion (£8.5trillion) in 2019, it is time that the UK regulators made it easier for larger funds to trade in the UK without showing their hand to the market or massively increasing market volatility.”
Ms McBride concluded in her piece for Briefings for Britain: “But maybe we should bypass the EU entirely and move on to doing more business in fast developing global markets.
“According to the World Bank, the total market capitalisation of listed domestic companies measured in current US$ has more than doubled since 2000, from almost $31trillion (£22trn) in 2000 to $68.7trillion (£48.7trn) in 2018.
“But the EU’s proportion of world market capitalisation has fallen, from 18.7 percent in 2000 to only 8.4 percent in 2018. So, tying the UK financial markets to the EU’s regulation would be as big a mistake as imagining that there are no investment opportunities beyond the EU’s borders.
“The UK shouldn’t be frightened of real competition.
“In other parts of the world there are competing financial service centres – Singapore, Hong Kong, Shanghai, Tokyo and Sydney are all in similar time zones and still survive. Admittedly they have carved out their own areas of expertise, and bankers get to choose the lifestyle that suits them. It is to be hoped that there will eventually be real competition in European financial markets, but at the moment the EU believes that it can win only by excluding the competition. The UK therefore needs to think smart, make itself as attractive to new business as possible and move on to greener pastures.”
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Chancellor Rishi Sunak
The EU’s chief Brexit negotiator Michel Barnier
Last month, Chancellor of the Exchequer Rishi Sunak did hail the potential for a “Big Bang 2.0” in the City of London after Brexit as he hinted that the Government is ready to slash red tape.
The Chancellor raised the prospect of a Margaret Thatcher-style surge for the City.
He stressed that while equivalence and other elements were important, his main focus would be to make sure the Square Mile “remains the most dynamic place to do financial services anywhere in the world”.
In an interview with City AM, Mr Sunak said “there are many things in the deal that are good for financial services”.
He cited the free flow of data, business travel, and agreements on legal and professional services – as well as suggesting a deal on regulation will be done soon.
Mr Sunak told the publication: “There is strong language on future regulatory cooperation, and putting in place a Memorandum of Understanding in reasonably short order to have that structured regulatory dialogue.
“And there’s a forum for future equivalence decisions as well. That’s a positive.
“But regardless of all that, I think it’s important that we get on and make sure that the City of London remains the most dynamic place to do financial services anywhere in the world.”
Referring to Brexit enthusiasts who claim that the City can now enjoy another Nineties’ style leap forward, Mr Sunak said they “make a really, really good point”, adding that people were free to “call it Big Bang 2.0 or whatever”.
He added: “If you look at the history of the City stretching even further back than that, it has always constantly innovated, adapted and evolved to changing circumstances and thrived and prospered as a result. And I think it will continue to do that.”
Mr Sunak said the Treasury would “play a role in that, and all the businesses and the people involved will help us do that”.
However, the Chancellor also played down the need for fundamental change in the City, pointing to its natural advantages and the “culture and creativity of our people”.
He noted: “Regulation is important, of course, as is timezone, as is language. All of those things are important.”