A woman wearing a protective face mask crosses the road outside the Bank of England in what would normally be morning rush hour in the City of London on March 17, 2020. The UK’s financial district is unusually quiet after the government asked people to refrain from all but essential travel and activities yesterday.
Britain officially left the European Union trading bloc on December 31, marking a new era for UK-EU relations.
After months of arguing, new trade rules were finally agreed just days before the year-end deadline. But in a document of more than 1,200 pages, there was very little mention of financial services: a sector which represents 7% of the British economy and 10% of its tax revenue.
A particular problem that arises is the clearing of euro-denominated derivatives.
The size of the European derivatives market exceeded €680 trillion ($834 trillion) in 2019, and the majority of European clearing activity takes place on London-based exchanges such as LCH.
So far, the European Securities and Markets Authority has agreed to extend current clearing arrangements for these derivatives until June 22, giving EU-based institutions more time to reduce their dependence on UK-based clearing houses. He has previously said he wants euro-denominated derivatives trading to only take place within the EU, or somewhere with “equivalent” regulations.
Both parties have committed to publish a Memorandum of Understanding within twelve weeks which will further clarify these equivalence rules. They are particularly important for the financial sector as they allow UK-based companies to sell services in Europe, as long as regulations do not deviate significantly from those in Brussels.
Douglas Flint, chairman of Standard Life Aberdeen, told CNBC’s Squawk Box that there seems to be “general recognition that financial stability is too important to risk by having an awkward exit.”
“There has been a discussion about mutual recognition or equivalence over the last four and a half years, so there would need to be a new approach between the UK and the EU to agree what is important and how whose infrastructure can continue to operate,” he said on Monday. .
The current arrangement allows the EU to withdraw equivalence rights for UK establishments with just 30 days’ notice, a decision the UK has no right to challenge.
“Europe has always been very defensive against external suppliers, so when the UK is considered an external supplier, it will have to take what is given to it,” Simon Gleeson, partner at Clifford Chance, told CNBC. “The regulatory response must therefore be a cooperative response between national regulators.”
So far, the approach has been piecemeal and on a temporary bilateral basis. For example, Italy announced on Sunday that it would allow British financial firms to continue operating as they are in the country for another six months.
Leaving individual regulators to make arrangements also complicated the setup in the field. Many UK-based banks have moved staff covering the Dutch, French, Spanish and German markets to the Continent, while those covering the Italian and Scandinavian markets have been able to stay in the UK.
The loss of the “passport” – or the ability to trade freely – after Brexit also means that the days when financial advisers could move in and out of Europe to operate are over. This has prompted many senior executives to move to other European hubs such as Frankfurt and Paris, the latter attractive due to the prospect of lower income taxes.
In October, EY estimated that the total number of financial services jobs leaving the country since the Brexit referendum was just over 7,500, an estimate below the grim scenario of hundreds of thousands predicted by some think tanks in 2016.
On banks’ preparedness, NatWest Chairman Howard Davies told CNBC Street Signs on Monday that while UK-focused banks were largely prepared for a “hard” Brexit by setting up subsidiaries on the continent , “what we cannot prepare for is the uncertainty that persists.”
“At the moment we don’t know what the future arrangement or regulation of cross-border entities in Europe will be. So there is a limit to what financial institutions can do while there are still very important moving parts here. “, he added.
In the long term, industry players are still positive about London’s fortunes as a global financial centre, with one hedge fund manager telling CNBC he would always be willing to support the UK because “our business is largely immune to change and most aspects of the city.” are very dependent on talent, knowledge and connections and for many reasons this is rooted in the UK”
Natwest’s Davies echoes that view, saying London will remain Europe’s biggest financial center for the foreseeable future, but the extent to which it can ‘retain intra-EU business will depend on new arrangements for co-operation. and regulatory equivalence”.
Former trade minister and senior adviser to Covington, Francis Maude, agreed. “London is not just a European financial center but a global center. I hope this will be dealt with in a pragmatic way with regulators operating apolitically,” he told CNBC last week, concluding that ” It’s not the end of one story, it’s the beginning of another story.”