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City of London hopes for EU thaw after Northern Ireland deal

City of London hopes for EU thaw after Northern Ireland deal

6 min. 08.03.2023
Breakthrough on another thorny Brexit issue has increased optimism that UK and EU can strike agreement on financial services
Photo credit: Shutterstock

UK Prime Minister Rishi Sunak’s deal to solve the bitter dispute with the European Union over Northern Ireland’s trading arrangements has sparked hope in the City of London that the two sides could finally formalise a pledge to work together on setting rules for banks and financial markets.

The so-called memorandum of understanding on financial rules may seem like a fairly low bar for such economically-tied neighbours. But in the recent history of post-Brexit relations, it would count for progress. 

Delayed for two years as other battles rage, the agreement is expected to gather fresh momentum if the “Windsor Framework” gets passed by Parliament.

“We are ready to start work on the finalisation of the MOU on financial services regulatory cooperation,” said European Commission spokesman Daniel Ferrie. That could “open a new chapter in our partnership - a partnership based on a spirit of mutual trust and cooperation.”

For optimists, the agreement could lead to joint thinking between HM Treasury and the European Commission over issues including money laundering, green finance, and cryptocurrencies. It could even lay the groundwork for a tripartite partnership with the US, forging international co-operation and better outcomes for firms with fewer divergent rules.

“A political dialogue would be new, and would allow for upstream financial services regulatory issues to be discussed every six months, or more frequently if required,” said Andrew Pilgrim, EY’s UK Government and Financial Services team leader.

Mood music

An agreement would give “the opportunity for the UK and the EU to have more constructive discussions on how our financial services industry should look,” Tiina Lee, head of UK and Ireland at Deutsche Bank AG, said in an interview Wednesday with Bloomberg TV. It improves “the mood music at every level.”

That could help heal wounds, uniting Europe including the UK, according to Adam Farkas, chief executive office of the Association for Financial Markets in Europe, an international trade body for banks. “If barriers are reduced, it could be a win, win, not an I win, you lose,” Farkas said.

An agreement would be a rare fillip for the City of London, which last year lost the top spot among Europe’s stock markets and is currently grappling with a slate of companies ditching local listings in favour of the US. But plenty say it would be largely a symbolic one.

“I’m sure there are a few areas which will become unblocked,” NatWest Group Plc Chairman Howard Davies said in a Bloomberg Radio interview this week. “But I doubt if that’s going to be the radical change in mood that people are looking for.”

There is scepticism that friendlier relations and officials sharing views on policy will have much of an effect on the amount of jobs and revenues moving from London to inside the EU. That is down to equivalence, the EU’s test of whether countries have rules as strong as its own, which determines what access they get to its market.

The UK has got almost nowhere trying to win equivalence agreements from the EU since Brexit. For Jonathan Hill, a member of Britain’s House of Lords and the EU’s former Commissioner on Financial Services, that is not a surprise. 

“An equivalence decision is a plum to give, and why would you give that before you know you want to give it and in exchange for something else?” Hill said in evidence to the House of Lords European Affairs Committee.

Level playing field

Brussels has granted equivalence to the UK in two areas since the Trade and Co-operation Agreement was signed in December 2020. One was over central securities depositories and ended June 30 2021. The other is for clearing, which has been extended to 2025 so that European banks and businesses can continue to clear euro-denominated derivatives trades in London’s liquid markets, rather than trying to force that business within the Eurozone, where there is not currently not enough capacity. 

London last year lost the top spot among Europe’s stock markets
London last year lost the top spot among Europe’s stock markets

David Schwimmer, chief executive officer of the London Stock Exchange Group Plc, said last week there were encouraging signs that the clearing arrangement would continue, which would be positive for its London Clearing House division. 

“We’re not overly concerned about the clearing discussion. It is pretty clear that Europe will continue to allow European members to access LCH Ltd,” Schwimmer said last week.

But many in the City still think more of that business will be forced inside the bloc as part of the EU’s long-held wish to boost local economies by creating a capital markets union across the member states, and to shore up the area’s financial stability.

Even those countries outside the bloc - such as the US - with multiple equivalence rights granted have restricted access in key areas such as investment banking.

“Equivalence is not the same as access,” said Nicolas Mackel, chief executive officer of development agency Luxembourg for Finance and a former senior European diplomat. “There would not be sales teams in the UK for the EU. It would not be possible to sell an investment fund from UK to EU retail investors, or an insurance policy to EU retail customers. That ship has sailed.”

ECB enforcement

The ECB is also continuing with its desk mapping exercise to establish if banks are adhering to post-Brexit rules about placing key staff dealing with European clients in their Continental offices, and not doing that work from the UK. 

That is likely to continue, according to two senior bankers. The improved mood music from the Northern Ireland deal is good news, but it is unlikely to have an impact on anything directly related to clients, one of the people said. The other said the EU’s grip on financial services remains tight. 

That has prompted some in finance and government circles to argue for greater divergence from the EU, arguing that among the potential benefits is that boosting the UK now could increase negotiating leverage for possible future re-entry.

The urgency of the challenge facing London was demonstrated last week when Cambridge-based chipmaker Arm said it would list in the US, not the UK, and FTSE 100-listed building materials company CRH said it would move its shares to New York. 

The government launched plans to boost the UK’s financial services through its Edinburgh Reforms, with proposals ranging from measures to modernise trading to changes to insurance capital to release billions of pounds for investment. 

Rethink required

But a greater rethink at the heart of British government is required to come up with bold ideas that will make London more competitive, according to Barney Reynolds, global head of financial services at law firm Shearman & Sterling.

“Those redesigning our regime need to be bold and take calculated risks,” he said. “Not all of those risks will pay off. But this needs to be done with the benefit of UK-focused, objective analysis.”

Andrew Griffith, the City Minister, appears to agree. “I have always been of the view that we need to go further - and not just rely on past success,” Griffith wrote in the Sunday Telegraph. “The UK must compete for every pound, dollar or euro of that business, with the Government providing the supportive environment in which to do so.”

Anyone arriving from Mars would think the UK and EU enjoyed strong co-operation over financial services, given their close proximity and the shared importance of the sector to their economies, Jon Cunliffe, a senior official at the Bank of England, once observed.

Yet even after Sunak’s Northern Irish breakthrough, both sides still appear to be worlds apart.

(Additional reporting by Caroline Hepker, Tom Mackenzie, Jorge Valero, Ellen Milligan and Francine Lacqua)

©2023 Bloomberg L.P.

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