The European Union could suffer even more damage than the City of London if a financial services trade deal is not agreed, a major House of Lords report has argued.
Six months in the making, Brexit: The Future of Financial Regulation and Supervision, claims that while the City faces huge potential damage if no agreement is reached in time the shocks could be more pronounced on the continent.
Chair of the committee behind the report, Baroness Falkner, told City A.M. it was “not a zero-sum game” and that the EU would suffer just as much, or possibly more, if a satisfactory deal was not struck.
In fact, she believes, there are opportunities for the City to grow on the back of Brexit – but only if the right framework is adopted.
“Financial services is very well placed to quickly adapt to disruptive change and strategically that is where your value add is going to come from,” she said. “In the near term you have to look at where growth is going to come from and in that sense I think the City is very well placed to weather the storm. But it needs to get a good deal, and above all it needs to know the direction of travel because it cannot adapt if it doesn’t know where it’s going. A bridge to nowhere is a pretty useless bridge.”
Falkner and the committee back the view that a comprehensive free-trade agreement (FTA), including services, would be the best possible outcome, but she flags concerns that there is still not enough clarity over the details.
In particular, it is still not clear exactly what the government wants out of transition – despite yet another major speech given by Brexit secretary David Davis last week.
Falkner and her committee argue for a three-stage process, encompassing a standstill, implementation and then exit, to minimise disruption for business, but the language being used by Number 10 gives little reason for Falkner to think there will be a high degree of flexibility.
“Until we see the government’s negotiating hand we can’t comment on whether there is sufficient time to get an FTA,” she adds.
Although Brussels has so far rejected the UK’s call for a bespoke deal, French President Macron’s recent intervention “opened the door” to that possibility, the peer believes, and it’s one that should be seized on.
“If we had joint regulation and agreed outcomes-based end states, rather than alignment-based end states, that would be preferable,” she explains. “We might do things separately because of different sectors or the way our rule book is laid out, but as long as our aims and objectives, and ultimate ends, remain the same that would be fine.”
But having last week criticised the government for shelving a financial services white paper Falkner also points to the confusion over Philip Hammond’s comments that there would only be “very modest” change after Brexit, arguing there are “too many voices” muddying the waters. “This is precisely why I am concerned that the white paper has been shelved… We do not know where we stand,” she adds.
Davis will be appearing before Falkner and the rest of her EU Financial Affairs sub-committee today, but she is not expecting any greater clarity, at least not on this issue. “He’s very difficult to pin down,” she says with a smile. However, Brussels also comes in for criticism, not least for its failure to engage with her inquiry, which stretched across the breadth of UK financial services and included written and oral submissions from Financial Conduct Authority boss Andrew Bailey, the Bank of England’s Jon Cunliffe, the City of London Corporation’s Catherine McGuinness and chair of the International Regulatory Strategy Group, Mark Hoban.
“Unfortunately, the EU institutions, because of the negotiation mandate Michel Barnier has taken upon himself, they didn’t come,” Falkner says. “We were very disappointed [but] I think it is their loss that they are not engaging.”
The report’s key recommendations:
- The UK and EU risk market fragmentation and financial instability if they cannot agree a deal on market access once the UK has left the bloc.
- The government must urgently clarify what outcome it wants from phase two of EU negotiations and on transitional arrangements, or firms will be forced to activate costly and potentially irreversible contingency plans.
- The UK must continue to adhere to international standards and find a way to shape them in future, especially if there is a risk of them being undermined by other states.
- The government should resist the temptation to implement policies that would come at the cost of financial stability.
- Moves by the EU to legislate in fintech should be resisted by the government if such initiatives threaten the UK’s flexible and adaptive approach.
- Brexit, in transferring powers to domestic regulators, should not result in an unintended deficit in democratic scrutiny and accountability of the sector.