by N. Peter Kramer
The end of last month the UK and EU agreed a new post-Brexit financial services pact that allow them to co-operate on regulation. Financial services were not a part of the EU-UK trade deal that came into effect in January. Free access for British financial firms to the EU has ended and any future access would depend on an EU system known as equivalence.
This refers to an EU system that grants market access to foreign banks, insurers and other financial firms if their home rules are deemed by ‘Brussels’ to be ‘equivalent’ or as robust as regulations in the EU. It is a patchy form of access that excludes financial activities like retail banking. It is a far cry from continued ‘passporting’, or full access, that banks lobbied for in the aftermath of the 2016 British referendum vote to leave the EU.
Access under the system if equivalence can be withdrawn at one month’s notice, what is making it quite unreliable. Brussels has only granted equivalence so far for two activities: derivates clearing houses in Britain since January for 18 months; and settling Irish securities transactions until June.
Faced with limited or no direct access, financial firms in London have moved 7500 jobs and over a trillion pounds in assets to EU hubs to avoid disruption to EU clients. Trading euro stocks, bonds and derivates have left London turning Amsterdam into Europe’s biggest share trading centre. The UK and the EU have agreed that asset managers in London can continue to pick stocks for funds in the EU. Also unilaterally allowing financial firms in the EU to offer selected services like credit ratings directly to British customers.
It is quite clear, that Brexit did not end London’s reign as Europe’s top financial centre. The City still has a towering lead over rivals Frankfurt, Milan and Paris when it comes to trading stocks, currencies and derivates and playing host to asset managers. Financial firms say shifting more capital out of London than is necessary would cause unnecessary and costly market fragmentation.