Sunak Says Access to U.K. Market Won’t Be a Brexit Weapon
Sunak Says He Won’t Use Access to U.K. Market as Brexit Weapon
(Bloomberg) -- Rishi Sunak tried to offer some last-minute clarity to the financial services industry just a few weeks before the Brexit transition period ends.
At the start of a speech to the House of Commons outlining government efforts to boost the sector, the Chancellor of the Exchequer on Monday announced a series of unilateral decisions designed to ease European Union firms’ access to the U.K.’s financial markets after 2020.
“In the absence of clarity from the EU, we’re acting unilaterally to provide certainty to firms both here and in Europe,” Sunak said, before his department detailed decisions that will help the bloc’s finance firms operate in the U.K.
From preventing higher capital demands for EU exposures to approving European auditing and insurance standards, these so-called equivalence decisions for EU and European Economic Area member states come less than two months before Britain is fully outside the bloc. They come despite few concessions so far from the EU.
Sunak did little to disguise his frustration.
“Whether others might wish to use equivalence as a political weapon, as I’ve set out today, that will not be our approach,” Sunak said. “We will approach equivalence in a technical way, in an outcomes-based way, and seek always to provide transparency and stability.”
The European Commission, the EU’s executive arm, is still considering whether to grant equivalence to the U.K. and if Britain’s regulations produce the same outcomes as the bloc’s, according to a spokesperson. The Treasury announcements don’t clarify if or how Britain intends to diverge from EU rules in the future, the spokesperson said.
Slow Going
So far, the bloc has allowed access to London’s dominant clearinghouses until June 2022 to keep the multi-trillion dollar derivatives markets stable, but has otherwise been reluctant to extend the same rights to investment banking and trading stocks and derivatives. The U.K. has given up its rights to “passports” for cross-border banking, so London firms hoping to do business in the EU must generally rely on Brussels declaring that Britain’s rules are robust enough in each area of finance.
The EU has granted one main equivalence decision to the U.K. this year -- but there are about 40 more to go. That’s left financial firms waiting to see if the EU changes course and grants last-minute equivalence to the U.K. With little time left, Sunak’s speech is the latest gambit by the U.K. government to try to push the European Union into a more open stance.
“Making equivalency designations without a quid pro quo agreement with the EU is a bold step by the U.K. and puts the ball in the EU’s court,” said John Garvey, global financial services leader at consultancy PwC. “Essentially, the U.K. is saying it is happy to be Europe’s financial services destination of choice.”
The cost to the U.K. of part of its finance industry moving to the continent could be enormous. The sector employs more than one million people in the U.K. and accounts for more than a 10th of all tax revenue. In 2018 that was 72 billion pounds ($93 billion).
That may be why the U.K.’s Financial Conduct Authority has already offered one olive branch, saying this month that British firms can continue trading all shares through EU venues, even if mutual equivalence cannot be achieved. That contrasts with recent guidance from EU regulators, who have only agreed to allow investors in the bloc to buy and sell European shares on U.K. exchanges if the trading occurs in British pounds, a specific case that amounts to less than 1% of EU trading activity.
But there’s little sign the U.K.’s increasingly vocal calls for openness will alter the EU’s approach, although it may make it easier for the U.K. government to shift the blame in the event of a messy Brexit.
“The statement is not going to change the EU’s position,” said Rob Moulton, partner at Latham & Watkins. “But it will make it easier for the U.K. to say that a failure by the EU to grant equivalence relating to licences is because the EU chose not to do so on political rather than technical grounds.”
Still, Sunak was careful to leave open the possibility that a deal could still be struck.
“We’ve made a range of equivalence decisions today, but not all of them,” Sunak said in a interview with Bloomberg Television. “There are some where it couldn’t be in our economic interests to do so, and others where we can’t simply do them without cooperation from another regime, and we remain willing and would like to have those conversations.”
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