Brexit means Brexit, of course. The UK will become a world leader of free trade deals; all will be sweetness and light, no really… As the old joke has it “The meek will inherit the earth – if the rest of you don’t mind, that is!” The UK is moving steadily towards the date when it formally notifies its EU partners of its intention to leave the EU, probably as early as 9th March 2017. Once that happens, the UK will find that what it wants must be tempered against what the EU27 is prepared to grant.
A foretaste of what the UK can expect has emerged from a private meeting of German businesses and banks, held last week in Frankfurt. This group has no political axe to grind and would surely want the most business friendly divorce between the UK and EU, however, significant problems with respect to the role of The City in a post Brexit world were highlighted.
Dr Andreas Dombret is an executive board member of the Bundesbank, Germany’s central bank and therefore an authoritative figure. Speaking to the meeting, he warned that the City may well lose its role as “the gateway to Europe” for financial activities.
"I strongly believe that this negatively affects the well-being of us all. We should therefore invest all our efforts in containing these trends. This holds for the private sector as well as for supervisors and policymakers in the EU and the UK. Some voices are calling for deregulation after Brexit. One such example is the 'financial centre strategy' that is being discussed as a fallback option for the City of London. Parts of this recipe are low corporate taxes and loose financial regulation. We should not forget that strictly supervised and well-capitalised financial systems are the most successful ones in the long run. The EU will not engage in a regulatory race to the bottom," Dr Dombert told the meeting.
Whilst he was certainly not advocating a confrontational approach to negotiations, he noted that even if “equivalent” banking rules were accepted between the UK and EU that that was "miles away from access to the single market".
Currently, almost 80% of foreign exchange activities within the EU are handled through London; the UK accounts for over a third of all wholesale banking for governments, pension funds and large businesses these arrangements are at risk because of Brexit. Over a million people are estimated to work in the financial and allied sector in the UK which handles trillions of pounds worth of business annually at the moment.
In Dr Dombret’s opinion, equivalence of EU/UK financial regulation would not be sufficient since the UK intends to withdraw from the ECJ: "I am very sceptical about whether equivalence decisions offer a sound footing for banks' long-term location decisions. Equivalence is miles away from single market access. Equivalence decisions are reversible, so banks would be forced to adjust to a new environment in the event that supervisory frameworks are no longer deemed equivalent. These lead to the overall conclusion that equivalence decisions are no ideal substitute for passporting. Let me say that I expect London to remain an important financial centre. Nevertheless, I also expect many UK-based market participants to move at least some business units to the EU in order to hedge against all possible outcomes of the negotiations."
He concluded that it was hard to imagine how the UK could remain at the heart of Euro-denominated insurance product clearing (derivatives) since such transactions required acceptance of the ECJ in the event of any disputes.