Brexit Deal Means U.K. Finance Will Lose Easy Access to the EU

(Bloomberg) -- U.K. financial services companies will probably have to keep shifting parts of their business to the European Union if they want to continue doing business in the single market after Brexit under the terms of a deal negotiated by Prime Minister Theresa May.

The arrangement, unveiled in London on Wednesday along with the terms of the withdrawal deal, is in line with what banks have been expecting for months. It’s also similar to the rules that govern how banks from other financial powers such as the U.S. and Japan do business in the EU.

Key Insights:

  • The future financial-services relationship between Britain and the European Union will be based on recognizing each other’s regulations, a process known as equivalence. This is what banks have been planning for.
  • The EU and U.K. will conclude equivalence assessments by the end of June 2020.
  • The outcome leaves London financial companies worse off than they are with Britain’s membership of the EU, which gives them the right to sell services across the bloc.

Market Reaction

  • The pound edged higher after the U.K. Cabinet approved a draft Brexit plan, removing a key hurdle to finalize a divorce deal with the European Union.

Bigger Picture

  • There’s no sense banks will reverse course and stop moving jobs from London. Plans that have already kicked in for several Wall Street firms. The transition deal might slow those moves, but given there’s no parliamentary approval yet and no-deal is still possible, banks are unlikely to take their feet off the accelerator.
  • A system based on equivalence means that banks and other financial players will probably need to complete the process of setting up new subsidiaries within the EU and move jobs, capital and client relationships.
  • The two sides will spend a withdrawal transition period until December 2020 working out the details of the new relationship. The U.K. will press for changes to the equivalence system to ensure the EU cannot easily revoke firms’ access to do business in the bloc.

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