Exclusive: Treasury to unveil equivalence vision for City in white paper
The government will insist on the right to diverge from EU financial services regulation as part of a post-Brexit trade deal with Brussels based on equivalence.
Writing in Morning Wire today, chancellor Sajid Javid says the City “will no longer be a rule-taker” and reveals that ministers are working on a white paper setting out a vision of the financial services sector once the Brexit transition period is over.
The government will set out its vision for the future of financial services, including the City’s future relationship with the EU and the rest of the world, in a white paper to be published this spring.
The strategy, which is still in development, will be published this spring and will outline how Downing Street expects its preferred system of outcome-based equivalence to work with the EU, as well as the UK’s framework for granting equivalence to other jurisdictions.
Beyond Brexit, it will also consider the industry’s future in relation to worldwide challenges such as emerging technologies and climate change.
Writing exclusively for Morning Wire,. Javid sets out the government’s plans to retain regulatory autonomy while seeking a “reliable equivalence process”, on which a “durable relationship” can be built.
“Of course, each side will only grant equivalence if it believes the other’s regulations are compatible,” the chancellor writes. “But compatible does not mean identical, and both the UK and the EU have at different times recognised the importance of focusing on regulatory outcomes.”
Pledging to retain “the highest international standards of financial regulation, and to shaping global rule-making”, Javid added: “We may choose to do things in the same way as the EU if it works for the UK. But there will be differences, not least because as a global financial centre the UK needs to keep pace with and drive international standards.
“Our starting point will be what’s right for the UK.”
He also re-committed to concluding “a full range of equivalence assessments” by June of this year, in order to give the system sufficient stability ahead of the end of transition.
Read more: City hits back at EU’s “improved equivalence” regime
One senior industry figure told Morning Wire that while a white paper was welcome after a long period where there had been “very little on the big picture for financial services”, it was important that the right balance was struck.
“The more you talk about trade outside the EU, the more you put at risk your EU structures,” he said. He backed Javid’s “flexible” approach towards equivalence, but noted it would be “quite challenging” to get the EU on board. He also warned that industry would need safeguards including commitments to give early warning of policy changes that might affect access.
The EU’s system of equivalence, as it currently stands, is viewed by many in the Square Mile as a highly unsatisfactory basis for UK-EU market access as it can be withdrawn by Brussels at short notice. Javid says that a future regime should ‘include measures to directly address the long-term needs of industry for a reliable equivalence process.”
Read more: Equivalence can’t trump passporting, warns bank boss
Miles Celic, chief executive of TheCityUK, urged the government to use the white paper to set out “much clearer processes for granting, maintaining and withdrawing equivalence than currently exist”.
He added: “These assessments should be made on a regulatory outcomes basis, supported by a UK-EU forum for regulatory and supervisory dialogue. Important issues that sit outside of the equivalence debate, such as data adequacy, also need to be addressed.
“Whatever the future relationship with the EU, the UK should continue to take a leading role in international financial services forums and rule setting.”
Read more: Brexit paper ‘a real blow’ to the City
Rachel Kent, head of financial services regulation at Hogan Lovells also called for clarity. “Perhaps the biggest issue for the City is continued uncertainty, so we welcome the forthcoming white paper, and the chancellor’s understanding of the contribution the City makes to the economy. Anything that facilitates frictionless trade to reduce costs for businesses and consumers is also welcome.
“Financial services presents a number of opportunities, not least sustainable finance and emerging financial technologies. The City needs policies that enable it to remain at the forefront of those things and to be able to continue to influence the regulatory agenda surrounding them.”
But Barney Reynolds, global head of the Financial Services Industry Group, told Morning Wire the government should seize the opportunity to set the tone of talks on a free-market basis.
“We should be getting back to the basics of competition on financial services, which we know has delivered growth and success, and led to having the best products being created in the UK. We should be confident of that, and shouldn’t get into nit-picking debates led by the EU,” he said.
However the stand-off between Switzerland and the EU “does show they like to control and threaten withdrawal in other contexts, so we shouldn’t put ourselves in that position”, he noted. “We need to fill in the gaps in equivalence, have a process around approval and withdrawal with notice periods, have independent arbitrations and reference to high-level outcomes based on international standards.”
Last month outgoing Bank of England governor Mark Carney stressed the need for the City to remain a rule-maker after Brexit.
“It is not desirable… to tie our hands and to outsource regulation and effectively supervision of the world’s leading complex financial system to another jurisdiction,” he told the FT.
This was then backed by former chancellor and Remain advocate George Osborne who told the BBC: “It will always be a trade-off between sovereignty – your ability to set your own rules – and your ability to sell into your biggest market.”