Theresa May Leaves London's Bankers In the Dark


Theresa May’s government has presented its eagerly-awaited proposal on the future relationship between Britain and the EU after Brexit. One area that merits careful scrutiny concerns the City of London and financial services, given their weight on the country’s economy and central position in global markets. 

After the Chequers agreement last Friday, it became clear that the U.K. would want to retain a “common rulebook” with the EU on goods, but not services. What this meant in practice remained anyone’s guess.

The “White Paper” unfortunately does little to spell out a relationship that would be acceptable to both Britain and Europe. May and her finance minister Philip Hammond are trying to walk a fine line between having a great deal of autonomy in regulating the U.K.’s financial services, while maximizing market access within the EU. For all their hopes, it’s still hard to see how this ends up without Britain becoming an EU “rule-taker” on services, as it will be on goods. Unless the U.K. resigns itself to this unpalatable fact, the fear of a “no-deal” Brexit remains.

The U.K. has had to retreat already from three different ideas for the post-Brexit City. The first was “passporting,” a legal mechanism that lets financial firms based in one EU country to do business in all other member states. Yet this would require staying in the single market, something that May’s government isn’t prepared to do.

The second plan was “equivalence,” where two markets facilitate cross-border trading by recognizing each other’s standards. This would allow U.K. entities to operate in the EU without having to stay in the single market. The problem, which has made the Bank of England skeptical, is that the EU could force Britain to implement rules it doesn’t like. Equivalence could also be withdrawn at short notice, making it a fragile arrangement.

The third suggestion was “mutual recognition,” which would let the U.K. and the EU draw up their own rules, while accepting those governing the other market. The British government and regulators were very keen on this until Michel Barnier, the chief EU negotiator, poured cold water over it. That’s because it would grant Britain exceptional autonomy, something EU member states don’t have, while giving it substantial market access. 

The White Paper is simply a variation on this third scheme. It offers some justification for why the U.K. should have substantial autonomy, including the need for British regulators to impose tougher standards given the City’s worldwide prominence. This is a questionable argument. Why wouldn’t EU regulators be equally capable of understanding the City’s importance to global market stability?

The document does try to show how the financial services relationship with the EU would evolve. The government wants a system of dialogue between regulators to agree rules, and mediation to paper over differences. But it’s hard to see this working in practice. The U.K. clearly wants to diverge from the rest of the EU, otherwise it wouldn’t be treating services so differently from goods. The EU will rightly fear that this will hand London too much of an advantage.

The U.K. does, of course, have some bargaining chips. The EU has plenty to gain from keeping a close trading relationship with the City. European companies are served well by London’s extraordinary financial ecosystem when raising equity, borrowing or buying in expertise. 

However, for the mutual benefits to continue, British policymakers will need to take a step back here and accept some loss of control to avoid an economically catastrophic no-deal exit. May and Hammond say that the ideal arrangement for finance will sit somewhere between “equivalence” and “mutual recognition.” Don’t be surprised if it ends up far closer to the former.

    This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Ferdinando Giugliano at

    To contact the editor responsible for this story:
    James Boxell at

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