Brexit-Free Budget Drops EU Access for Finance Down the Agenda

A widening gap between Britain and the European Union over finance regulation is starting to emerge, with a post-Brexit alignment dropping down the U.K. agenda.

In policy statements Wednesday, Chancellor of the Exchequer Rishi Sunak outlined measures to increase London’s competitiveness, including easier listing standards and a likely cut in bank levies. There was no discussion of trying to win Brussels’ endorsement for the regulatory equivalence that big firms like HSBC Holdings Plc say is vital.

Underscoring the divergence, Jonathan Hill, the former European Commission official who led London’s review of listing rules, said he doubted the EU would grant equivalence, so there was little point in hoping for it. The U.K. shouldn’t “sit here waiting and hoping that the EU will give us some of these decisions that some people are hoping for, these equivalence decisions,” Hill told the BBC Wednesday. “They aren’t going to do that.”

Hill’s report, which Sunak endorsed, called for measures to attract blank-check firms to float in London and a dual-class share ownership to let company founders keep greater voting power, something seen in U.S. tech giants such as Facebook Inc.

Markus Ferber, a German member of the European Parliament, said the proposals amounted to an “ambitious modernization” and a challenge for Europe.

At the same time, they could make the granting of equivalence even less likely. “It’s not possible to have equivalence with divergence,” Mairead McGuinness, the bloc’s commissioner for financial services, said at a conference Thursday. “We have to be really cautious about the future plans of the U.K.”

The sparring in finance highlights the tense relationship marked by U.K. assertions of sovereignty and EU concerns of being undercut on taxes and regulations. Boris Johnson’s government took unilateral action on one of Brexit’s most contentious issues -- extending a grace period on paperwork related to trade into Northern Ireland, which the EU says is a breach of international law.

Key Priority

Equivalence gives the EU its own unilateral authority to decide if British rules are close enough to ensure a relative status quo, which is what the U.K’s largest banks want.

Without those rulings in place, London-based finance firms that wish to do business inside the EU are saddled indefinitely with the added complexity and cost of supporting operations in both the U.K. and the bloc. Assets and jobs have begun to shift to the continent and the continuing uncertainty has been a source of frustration for the finance industry, one of the key pillars of the U.K.’s economy

Only last week, HSBC Holdings Plc said in its latest annual report that reaching a deal on financial services should top the agenda for British and European negotiators.

“Given the many benefits that the U.K. financial services industry brings to the U.K. and EU economies, equivalence must be a key priority for both parties,” said HSBC Chairman Mark Tucker in a statement.

Barclays Plc warned in its own annual report that the failure to secure some kind of deal could lead to cross-border financial services becoming more complex and costly. That could cause a “material adverse effect” and force it to exit some businesses.

Privately, those involved in following the talks at major banks had largely written off the idea that the EU would grant the U.K. equivalence in anything beyond a narrow set of areas in which it suited the single bloc. And even these exceptions are time-limited and largely meant as a temporary bridge before more operations are transferred.

Banks did get a possible break from the finance minister, though. He told Parliament in his annual budget statement that the 8% surcharge on lenders’ profits would be reviewed. If left unchanged, banks would see taxes on their earnings rise to 33% in 2023, as the U.K. government increases corporation taxes to help fund coronavirus support programs.

Hopes Raised

The pound had rallied late last month on hopes that equivalence might not be the dead end that many thought.

Speaking to Bloomberg last week, Clement Beaune, France’s junior minister for EU affairs, said “There will probably be partial equivalence, probably by the end of the semester.”

A leaked draft of a financial-services memorandum of understanding between the U.K. and EU, which was first reported by Bloomberg, also offered a glimmer of hope. A passage referring to the possibility of “informal consultations” on the issue of equivalence was taken by some as a possible opening for a deal on greater access.

Ferber said that while there were strong signs of growing divergence between the U.K. and EU, this did not necessarily mean an equivalence deal was dead. “100% alignment with EU rules is not a necessary precondition,” he said. “After all, jurisdictions such as the U.S. have also obtained equivalence status for prospectus despite some divergence in the details.”

Hoping for clarity from Sunak on the question, though, would have led to disappointment.

“There was no word from the Chancellor how British businesses can maintain their market access to the EU,” said Alex Altmann, head of accountancy firm Blick Rothenberg’s Brexit advisory group. “It seems the Government has brushed Brexit under the carpet already.”

©2021 Bloomberg L.P.

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