Brexit's Financial Turf War Enters A New Phase

(Bloomberg Opinion) -- Rarely have policymakers seemed so keen to snap the links that connect global markets, even at the risk of economic self-harm.

Theresa May’s dogged pursuit of a Brexit that takes Britain out of the European Union’s single market and customs union is an obvious own goal, considering the City of London’s global position. The U.K.’s intransigence has already sent an estimated 800 billion pounds ($1 trillion) of bank assets and 5,000 jobs across the English Channel and Irish Sea.

Meanwhile, the EU’s plans to build high regulatory walls to protect its markets from a rogue neighbor have also led to some head-scratching propositions from Brussels, such as potentially forcing fund managers to trade top U.K. stocks on continental European soil rather than in London. 

In an ideal world, this month’s decision by Europe’s leaders to kick the Brexit can down the road by another six months – with every chance that it ends up being kicked again, and again – would be a chance for cooler heads to prevail. The economic context would certainly seem to demand that. Growth is petering out on both sides of the Channel, with British and euro zone GDP expansion expected to slow in 2019, according to Bloomberg Economics.

At the same time, big European investment banks are still earning sub-par returns; the shares of Barclays Plc, UniCredit SpA, Societe Generale SA, Commerzbank AG and Deutsche Bank AG all trade at less than half their book value. This would be a good time for regulators and officials to find common ground, rather than succumb to grand-standing and punitive policy-making.

Sadly, it’s more likely that this financial turf war is about to enter a new phase. The euro zone’s financial regulators are reluctant to allow any back-sliding by finance firms on moving operations from London to the EU ahead of the split. Reports indicate that banks aren’t being given more time or more flexibility on this, despite the Brexit delay to October 31.

For its part, the U.K. can’t stop its saber-rattling, largely because it has no real leverage when it comes to negotiating with Brussels other than the systemic importance of its banking infrastructure. Andrew Bailey, head of the Financial Conduct Authority and the bookies’ favorite to be next governor of the Bank of England, reiterated this week that Britain would retaliate if Brussels carried out its threat to force stock trading onto EU soil.

Where the Brits may seek to exploit the current limbo is in pushing for “equivalence” for their finance firms. This is a Brussels-mandated regulatory seal of approval that allows limited cross-border access to the EU, provided your financial rules are deemed sufficiently in line with Europe’s.

While it’s not a patch on actually being part of the EU, equivalence does offer some valuable safety nets. It would at the very least neutralize that threat on where U.K. stocks can be traded.

British regulators have made clear they don’t want a race to the bottom on regulation after Brexit, and their rules are already identical to the EU’s. But they want to be reassured that equivalence won’t be withdrawn on a whim. City lobbyists will no doubt pursue this point in the coming months as they try to get member states to nudge Brussels toward regulatory leniency.

Unfortunately for them, it’s hard to see why the EU would make substantial concessions on its equivalence regime when it’s so central to its ability to protect its own financial turf. The European Commission has praised the way that equivalence works currently and said it intends to enforce it to the letter.

Alasdair Haynes, head of the small U.K. stock-trading firm Aquis Exchange Plc, reckons the regulatory standoff is going to get worse, and he’s already adjusted his business in response by setting up a European subsidiary in Paris. There’s no detente in sight.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Opinion columnist covering Brussels. He previously worked at Reuters and Forbes.

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