Reactions as UK gov’t White Paper confirms end of passporting

The UK government has confirmed that its negotiations with the EU27 over Brexit will see it aim to end passporting rights for financial services.

The confirmation comes in the policy paper titled The future relationship between the UK and the European Union, which was published on 12 July, 2018.

The document notes “new economic and regulatory arrangements for financial services, preserving the mutual benefits of integrated markets and protecting financial stability while respecting the right of the UK and the EU to control access to their own markets – noting that these arrangements will not replicate the EU’s passporting regimes”.

It goes on to argue that because the UK’s financial sector is so embedded in the EU’s overall, the existing third country equivalence regime is not fit for purpose for providing a model that could be applied in the case of the UK post Brexit. Instead, the UK government proposes “a new economic and regulatory arrangement with the EU in financial services. This would maintain the economic benefits of cross-border provision of the most important international financial services traded between the UK and the EU – those that generate the greatest economies of scale and scope – while preserving regulatory and supervisory cooperation, and maintaining financial stability, market integrity and consumer protection.”

Achieving this would rely on ” reciprocal recognition of equivalence”, the document suggests, but it is likely that achieving this would be difficult to agree because the document also states that “future determinations of equivalence would be an autonomous matter for each party”, but that achieving agreement, for example, on supervisory issues would rely on new “supervisory colleges”.

Commenting on the paper, policy chairman of the City of London Corporation Catherine McGuinness said: “[The] Brexit White Paper is a real blow for the UK’s financial and related professional services sector.”

“With looser trade ties to Europe, the financial and related professional services sector will be less able to create jobs, generate tax and support growth across the wider economy. It’s that simple. The sector has been clear since the referendum: Equivalence in its current form is not fit for purpose so any ‘enhancements’ to this regime would have to be substantial.”

“As the EU’s gateway to capital, the UK is a significant trading partner for the bloc. It’s in the interests of households and businesses on both sides of the Channel that an ambitious future trading relationship, covering services as well as goods, is secured. Failing to secure such a deal would put up unnecessary trade barriers and runs the risk of fragmentation of financial markets, increasing costs and reducing choice for consumers.”

“Time is running out so it is essential that the pace of negotiations accelerates to ensure an orderly Brexit. Both sides should engage constructively to deliver a deep and comprehensive relationship covering services, not just goods, for the benefit of consumers and citizens across Europe.”

UK Finance chief executive Stephen Jones said: “The UK is currently the second largest exporter of services worldwide. Tens of thousands of customers and billions of euros of banking and capital markets services are reliant on the UK remaining Europe’s most interconnected financial centre.”

“As the government recognises in [the] White Paper, it’s entirely possible to use the tools and trust we have established during 40 years of membership of the EU to construct a new arrangement that preserves some of the benefits of close alignment without sacrificing political and regulatory autonomy.”

“However, as to[the] paper makes clear, simply relying on existing equivalence arrangements will not provide financial institutions with effective market access that enables them to serve their customers. The government is right to want to propose a new economic and regulatory arrangement which seeks to strengthen and expand the current third country regime.”

“Given the limited time available it is vital that both the UK and EU27 negotiators come to the table and focus on ensuring a legally enforceable agreement, delivering enhanced and expanded third country arrangements that enables meaningful cross-border market access in financial services. In this way firms on both sides of the Channel can continue to serve business and clients across the UK and Europe without risking financial stability.”

Chris Cummings, chief executive of the Investment Association said he welcomed the “much-needed clarity this paper brings as we look to shape our future outside the EU”.

“While it is clearly disappointing that the Government has ruled out mutual recognition as their preferred option, we believe that a solution based on enhanced-equivalence can deliver a deal that works for savers in the UK and across Europe, and for the asset management industry that supports them. We look forward to working with the Government to build a framework that delivers prosperity for the millions of savers in the UK and around the world.”

“Every negotiation requires compromise. It is clear that our relationship with the EU is going to change, and we hope that both sides can approach this next stage in the spirit of the broad and special partnership that the UK has always had with the EU. A partnership that has for decades allowed our industry to contribute to the prosperity of millions of citizens across the whole of Europe.”

Huw Evans, director general of the Association of British Insurers, said: “Publication of the White Paper is an important step in the Brexit negotiations. Whatever the final outcome, the insurance industry is too important to be a rule taker. Having to comply with financial regulations we have no say over would be the worst possible scenario for our world leading insurance sector, so we will look to the government to negotiate a better outcome than this.”

Paul Mumford and Nick Burchett, portfolio managers at Cavendish Asset Management, put the White Paper into context of businesses not panicking, but also requiring clarity in order to plan.

“A running theme of the Brexit saga since the vote is that is has caused far more political than economic drama, at least so far,” they say.

“This seems to still be the case now, despite the serious rift the Chequers agreement has opened within the Tories. Business hates nothing less than uncertainty, yet the market is merely noting and not reacting to these resignations. The idea that British businesses are panicked is an exaggeration to say the least. The companies we invest in and speak to are generally unbothered by events – while Brexit is a consideration on the horizon it is merely one among many, and usually not a main one, which the firms are subsequently posed to make necessary adjustments to either way.”

“This suggests that despite the political musical chairs, there remains an expectation that some sort of ‘soft’ Brexit deal – perhaps not that unlike the Chequers accord – will be agreed before March next year.”

This is certainly what the market would prefer. This is not because the market and UK business world is made up of staunch remainers who want to stay in the EU. Far from it. There are clear long-term economic benefits for the UK in being able to decouple itself from a structurally shaky eurozone (especially with regard to Southern European banking) while also forging its own wider trade area – and many recognise this.”

“But in the immediate term what businesses need more than anything else is clarity and the ability to forward plan. A ‘soft’ Brexit arrangement for March 2019 is ideal, not necessarily as a final destination, but as a starting point and means of getting over that initial line. This would allow for a far smoother transition, mollify remainers, but also allow for a considered and piecemeal divergence over time in line with our economic interests (as opposed to a needless and likely damaging rush to replace everything by an impractical deadline).  The most important thing in the short term is to start to evolve and engage again with trading partners for a progressive agreement that will suit both sides.”

“Of course this depends on May climbing a bit of political mountain, and overcoming the twin thorns of the NI border and immigration, but she is in a stronger position than it might seem. While a leadership challenge seems likely, it is unlikely that the Brexiteers will go so far as to topple the government or trigger an election, simply for the sake of a hard Brexit now (potentially risking a Corbyn administration, which would simply want the softest Brexit anyway). A second referendum is even less likely.”

“The real danger point would be if we get to October with little progress from the current position. A ‘crash out’ no-deal scenario would be in no-one’s interests. The key thing now is to watch for Europe’s reaction to the now released whitepaper. While the bloc has driven a hard line so far, hopefully the resignations and turmoil will signal that they have reached the limit in terms of what they can practically push the UK for in terms of concessions. Should May be forced into making further significant concessions, there will be trouble ahead. The EU needs us too.”

“In a strange way, Trump’s initiation of trade wars has taken the heat off the UK. When we voted to leave, the UK was alone is seeking to renegotiate the international economic order. Now it appears the whole setup is up for grabs on multiple fronts! Maybe the UK is simply ahead of the curve.”

To read the full White Paper click here: The_future_relationship_between_the_United_Kingdom_and_the_European_Union_WEB_VERSION

Jonathan Boyd
Editorial Director of Open Door Media Publishing Ltd, and Editor of InvestmentEurope. Jonathan has over two decades of media experience in Japan, Australia, Canada and the UK. Over the past 17 years he has been based in London writing about funds and investments. From editing the newsletter of the Swedish Chamber of Commerce in Japan in the 1990s he now focuses on Nordic markets for InvestmentEurope. Jonathan was awarded Editor of the Year at the Professional Publishers Association (PPA) Independent Publisher Awards 2017. Shortlisted for the same in 2016, he was also shortlisted in 2017 and 2015 for the broader PPA Awards category Editor of the Year (Business Media).

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