(Bloomberg) -- The European Union is preparing to offer the U.K. a bare bones deal for its banks after Brexit, even as divisions are starting to emerge within the bloc about how harshly to treat the City.
According to the latest draft of the EU’s negotiating stance, the bloc will consider offering the U.K. “improved equivalence” for its financial services. That means the EU will only let U.K. banks access its market for as long as it considers British rules to be equivalent to the bloc’s. It’s an unstable arrangement as the EU can rescind it at short notice, and Chancellor of the Exchequer Philip Hammond has called it "wholly inadequate."
But the wording of the draft is ambiguous, according to two EU officials and reflects internal debate among the remaining 27 countries. What ”improved" means is still to be defined, one of the officials said. France and Luxembourg -- at opposition ends of the debate on what Brexit should mean for the City -- led the effort to get the new wording included in the draft.
Luxembourg has called for a pragmatic approach on financial services, while France has been more hardline about the sacrifices Britain has to make if it’s leaving the single market.
Britain and its banks have long given up hope of keeping full access to the single market via so-called passporting rights. But they are now pushing for a system of mutual recognition as they want a set of rules that is more durable and not subject to unilateral withdrawal. Hammond has said that a post-Brexit trade agreement that doesn’t include services wouldn’t be "fair and balanced."
While the U.K. argues that keeping the City as a financial hub is in the interests of the EU and London, the EU says its priority is financial stability and respecting the integrity of the single market. Throughout talks, the EU has rejected attempts by the U.K. to cherry pick the best bits of EU membership.
One interpretation of "improved equivalence” is that the EU is already working to tighten up its equivalence regime -- which is used now by U.S. banks -- and is doing so with Brexit in mind.
But the U.K.’s finance lobby saw the glass as half-full.
"The EU has come a long way from its stance before Christmas when we were told a deal encompassing financial services was impossible. Now it is actively seeking ways to include financial services in the deal," Miles Celic, chief executive of TheCityUK, said.
The new wording is in an annex to the draft guidelines for discussion among EU ministers. Earlier drafts didn’t mention financial services explicitly although they made clear that the trade agreement the EU intends to strike with the U.K. wouldn’t make special provisions for services.
“Regarding financial services, the aim should be reviewed and improved equivalence mechanisms, allowing appropriate access to financial services markets, while preserving financial stability, the integrity of the single market and the autonomy of decision making in the European Union,” the new draft reads. “Equivalence mechanisms and decisions remain defined and implemented on a unilateral basis by the European Union.”
The commission has already started to review financial services legislation, to ensure that equivalence rules are appropriate for the situation after the withdrawal of the U.K., according to the document.
The commission has recently started to address some shortcomings of its equivalence regime. In December, it proposed to tighten the procedure for allowing firms access under MiFIR, a regulation that includes a third-country regime for a range of investment services. The aim was to set out the requirements for equivalence “in greater detail,” according to the commission.
In an apparent nod to the U.K., the commission made clear that an equivalence recognition wouldn’t be easy to obtain. The assessment would have to be “very detailed and granular and also assess supervisory convergence with the EU” when it comes to third countries whose firms may be of “systemic importance” to the bloc, the commission said.
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