(Bloomberg Opinion) -- Not long after Britain voted to leave the European Union, the City of London’s chiefs grudgingly began hammering out plans for the worst: that Britain might eventually abandon the EU’s single market. Now the future is suddenly looking even more uncertain.
U.K. Prime Minister Boris Johnson’s move on Wednesday to suspend, or prorogue, Parliament before the Oct. 31 Brexit deadline has not only made an economically punitive no-deal departure potentially more likely.
It also makes it very difficult, if not impossible, to enact the Financial Services Bill that was deemed absolutely critical for the City in the event of a break-up without an agreement. Suspending parliamentary activities for as long as five weeks through mid-October means it’s highly unlikely there will be time to pass it.
The bill was designed to enable the U.K. government and regulators to continue to implement the EU’s financial rules that are currently in the works for as long as two years after Brexit. It provides a degree of comfort to firms and Britain’s EU counterparts that the U.K. will be keen to minimize disruption in the medium term even without a deal. If say, fresh EU rules were to be implemented in December, the U.K. would be able to do the same without the need to pass primary legislation. Without it, Britain’s divided parliament may need to go through the painful process of passing piecemeal legislation to respond whenever the EU changes course on financial services. That could leave banks in legal limbo and reinforce the EU’s hand.
The bill not making it through the legislature before Brexit creates some uncertainty that some firms say -- with just two months to go -- they’re still assessing fully. That said, there’s optimism that the overnight repercussions should be contained: the U.K. and the EU have agreed to temporary permissions that should allow firms and markets to continue to operate relatively smoothly. The Europe markets watchdog, ESMA, for example, has agreed to recognize UK-based LCH, ICE Clear Europe and LME Clear as central counterparties in case there’s a no-deal Brexit.
But, more significantly, absent the bill, Britain in effect is sending the message it doesn’t necessarily plan to adhere to EU rules after Brexit. It’s a dangerous signal: Being okay with the collateral damage to U.K. finance at such a delicate time could cost Britain more than it’s gambling for.
Short of retaining full passporting rights which only come with membership of the single market, the U.K. has been preparing for a relatively loose arrangement that would see its regulatory framework being recognized by the EU. Under what is known as equivalence, foreign firms can offer their services into the EU provided the financial rules in the home country are deemed to match the desired outcomes of those in the bloc.
Just a few weeks ago, the European Commission reaffirmed its guidance on such arrangements which come with few guarantees. In short, equivalence is granted unilaterally by the Commission, which intends to step up the monitoring of third countries that have been granted access on that basis. What’s more, Brussels wants to apply closer scrutiny and place higher demands of nations seeking equivalence “whose impact on the EU markets is high.” There’s no mistaking that this must mean the U.K., given its deep and complex interactions with the EU.
There are other signs the U.K. is starting to go its own way on financial regulation, as my colleague Silla Brush reports. The U.K. Treasury wants the Bank of England to be freer to intervene in swaps market.
For any U.K. market participant, a step further away from equivalence adds yet more uncertainty to longer-term planning that could force a fresh reassessment of where to place resources.
Sure, the EU’s recent experience with the suspension of equivalence in Switzerland hasn’t caused the dislocation that some had feared. Switzerland has repatriated the trading of Swiss-based companies’ shares, a disappointment for Brussels which had sought to force EU firms to trade those stocks on the continent.
Yet now is not the time to be undermining an industry that contributes to about 7% of the U.K. national output and which relies on the EU for almost one fifth of its activities. Trade tensions, declining yields and sluggish economic growth are already putting pressure on finance.
Till now, though they’ve armed themselves with the necessary permits to operate from the EU, firms have been putting off moving large numbers of staff and assets. The tide could quickly turn if the EU signals it’s going to get tougher on equivalence.
To contact the editor responsible for this story: Stephanie Baker at stebaker@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.
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