London: Although the UK has finally reached a post-Brexit trade agreement, the future of the UK’s major financial services industry is uncertain before the bilateral talks.
Before Britain officially divorced the European Union on December 31, London and Brussels finally reached an agreement during Christmas.
Britain then departed from the EU single market and customs union with effect from January 1. Yet crucially, the agreement — four and a half years after Britain narrowly voted to leave — did not encompass the finance sector.
“This (trade) deal is a starting point. We’ve got months of this to come,” Simon Gleeson of law firm Clifford Chance told AFP in reference to financial services.
The 1,200-page post-Brexit agreement gives scant detail about the industry, which is worth about GBP 150 billion ($204 billion, 166 billion euros) per year or seven percent of the UK’s annual economic output.
Finance dwarfs Britain’s politically-significant fishing industry, which accounts for less than 0.1 percent of GDP and yet was a key factor in delaying the trade deal.
The current goal of the UK and the EU is to reach a memorandum of understanding on financial services by March and establish a road map for cooperation, although officials have downplayed its impact.
The governor of the Bank of England, Andrew Bailey, remains optimistic about negotiating a so-called “peer-to-peer” system, which makes rules compatible to keep trade in certain services smooth.
“We’ve been working on these issues for a long time,” Bailey told a virtual parliamentary hearing on Wednesday.
“We have strong relationships with our partners in the EU… and our joint objective is to keep it that way because it benefits both of us.”
From January 1, the UK financial sector lost single market access and its European “passport”, a device allowing UK financial products and services to be sold in the EU.
The ability of the financial sector to do business in the bloc now hinges on obtaining equivalence across 59 specific areas.
London is already equivalent to EU financial companies in many of these areas.
However, so far, Brussels has granted British financial companies equal status in only two areas (including the liquidation of derivatives).
Although the United Kingdom played a role in establishing the EU’s financial legislation, Japan has obtained more than two authorizations under the EU’s trade agreement.
However, Brussels is still worried about disagreements that would cause British companies to weaken and threaten the EU’s own financial services industry.
Gleason added: “Brussels wants to get a formal commitment from the UK to supervise in accordance with EU regulations.”
“I think we’ll see London-based firms backing down from doing business with Europe.
“The mere hope that there might be a deal in four months is not enough.”
The European Commission does not appear to be in a hurry because it is currently examining equivalence requests for just 28 specific areas.
British Prime Minister Boris Johnson appears eager to agree an acceptable alignment deal — but does not want identical EU regulatory rules for political reasons.