As the global political and business elite gathered in Davos last week, there was an almost deafening silence on one of the thorniest issues currently facing British business: what happens to the City after Brexit?
Amid some of the recent signs of progress in Brexit negotiations, the financial sector has been left guessing what Theresa May has planned for its future relationship with the EU.
City bosses had been promised a position paper outlining the government’s vision. Last week, it emerged that David Davis’s Brexit department may never publish one.
Even the CBI, which has recently stepped up its lobbying by calling for Britain to remain in a customs union with the rest of Europe, has offered little succour for the sector that provides nearly 12% of tax revenue.
An absence of customs checks may help goods to flow freely back and forth across the Channel, but it does not address the predicament of UK-based financial institutions that face the loss of “passporting” rights to sell their services throughout the EU.
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City bosses are getting jittery, arguing that they cannot plan for the long term if they do not know the government’s negotiating priorities.
Q So what does the City want?
A May has plotted her approach to the post-Brexit trade deal she hopes to negotiate with the EU in a series of position papers covering everything from Northern Ireland to the nuclear industry.
Despite broad statements from ministers that financial services should be part of any deal, no detailed proposals have been published.
The UK financial services sector, which employs more than 1m people across the country, has come up with a blueprint of its own.
The City of London Corporation and TheCityUK have backed a model that would allow British firms to continue trading across the EU (and EU firms in Britain) under a “mutual recognition” between Brussels and London of each other’s regulatory systems.
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This idea would be enshrined in a financial services chapter of the final UK-EU trade agreement.
The plan is certainly ambitious. Banks, insurers and asset managers want to be able to sell their services across the EU border without having to obtain a special licence. That would require an agreement on services that goes far beyond the Canada-EU free trade deal repeatedly touted by Brussels as a model for Britain’s. Even so, Britain and the EU start from a position where their legal and regulatory systems are largely aligned, and supervisory bodies such as the Bank of England already co-operate closely with EU counterparts. That, in theory, will make it easier to reach a deal.
Q What happens when regulations change?
A The rules may be aligned on day one, but at some point Britain’s regulatory system is bound to move out of line with the Continent’s. For example, Bank governor Mark Carney has suggested that Britain could scrap the EU cap on bankers’ bonuses after Brexit. Under the proposed system, both sides would have to agree that such changes do not have an impact on an agreed set of regulatory “outcomes” — issues such as financial stability or consumer protection.
Q Hasn’t the EU already vetoed all of this?
A Michel Barnier, the EU’s head negotiator, has said that Britain must choose between a Norway-style membership of the single market — which has already been ruled out by May — or a deal along the lines of Canada’s, and cannot “cherry pick” access for certain industries.
Senior figures in the City remain optimistic that this is a negotiating tactic, and that Brussels will soften its stance over time.
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London is the eurozone’s de facto financial centre, meaning that any loss of access could result in financing problems for European firms and disrupt cross-border flows of capital.
Some EU leaders have indicated a willingness to compromise. French president Emmanuel Macron said on his recent visit to the UK that Britain could end up with “something between full access and a trade agreement” if it agrees to sign up to the EU’s preconditions.
Meanwhile, Ireland’s prime minister Leo Varadkar said in Davos that the UK-EU trade deal “will have to be
a specific agreement as there is no precedent for the relationship”.
Q Why won’t the government publish a blueprint for the sector?
A May’s cabinet still appears divided on its Brexit plan. Chancellor Philip Hammond earned a swift rebuke from the prime minister last week after he suggested in Davos that there will be only “modest” changes in Britain’s EU relationship.
In that context, it is perhaps hardly surprising the government is reluctant to lay its cards on the table over one of the most contentious aspects of Brexit, particularly if Barnier is liable to slap down any suggestions of a special deal for the City.
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Q Where does that leave the City in the meantime?
A In the dark. Senior figures in the City complain that they can’t plan for a journey when they don’t know the destination.
As banks and other institutions begin to activate their Brexit contingency plans, the trickle of jobs moving to the Continent is likely to accelerate.