The UK tried to keep the doors to the European market open for its financial services industry—but it failed. In a speech today (July 1), Rishi Sunak, the UK’s chancellor of the exchequer, announced that any hope of a post-Brexit deal to enable the country’s financial sector to operate freely in the EU was dead.
The announcement did not come as a shock to London’s bankers, who have long known that negotiations have broken down. But Sunak’s declaration made official a big blow to an industry that has already been leaking business into the continent.
Sunak’s comments, which were part of his annual Mansion House speech to London’s financial services sector, came towards the end of a week in which JPMorgan made its new Paris offices its main trading hub for Europe. Sunak’s speech didn’t acknowledge the jobs and businesses that have already moved to Europe. Instead, he spent time praising the sector, which pays £76 billion ($105 billion) in tax annually—”enough to pay for our entire police force and our entire state schools’ system.”
The UK’s financial services industry, which manages assets worth £9.9 trillion, didn’t figure in the final trade deal that the UK and the EU struck. Before Brexit, banks based in the UK had “passporting rights” that allowed them to offer banking services across EU borders and to set up branches in EU countries easily.
To compensate for the loss of these rights, the UK has been trying to persuade the EU to grant the financial services sector permanent “equivalence.” This would give the UK’s banks the ability to continue doing business in and with Europe as they’d been doing before Brexit—as long as the UK’s financial regulations roughly matched those of the EU. Under this regime of equivalence, the EU could unilaterally withdraw from the arrangement, but that was still considered a better situation than leaving banks without equivalence or passporting rights—a situation in which banks would have to apply for licenses in each individual EU country and could only offer a smaller set of services once licensed.
At the moment, the EU has granted temporary equivalence to key financial institutions in the UK, which lasts until the middle of 2022. In March, the UK and the EU agreed on a memorandum of understanding that covers voluntary cooperation on financial services regulation, and observers hoped it would evolve into a deal on equivalence.
“This has not happened,” Sunak declared. “We now have the freedom to do things differently and better, and we intend to use it fully.”
The UK’s admission of defeat at failing to secure equivalence may unsettle London’s financial sector further. In April, an analysis by New Financial, a London think-tank, calculated that at least 440 banks and financial services companies had moved some part of their operations and managed assets from London to European cities. These firms would take around £900 billion in assets with them, said William Wright, New Financial’s founder.
And the EU is actively trying to move more financial activity from the UK to the continent. In particular, the EU has its eyes on a big prize: London Clearing House’s (LCH) control of the $122 trillion market of euro derivatives clearing. At least 80% of that market is made up by LCH, and given that the company deals in multiple currencies, relocating that market to Brussels’ Eurex exchange will be complicated.
But as of now, LCH can serve EU customers only until June 2022, when the temporary equivalence arrangement runs out. This month, the EU began asking companies to recommend legislative changes that could help shift more activity from LCH to Europe.
Andrew Bailey, the Bank of England’s governor, accused the EU in February of trying to poach firms from London. Trying to shift derivatives clearing activity, Bailey said, was “a very serious escalation.”