By Tanisha Aggarwal
With news that the UK and the EU have reached a deal on financial services co-operation, a pathway to future EU market access is now open for the City of London. However, the technical details do not include the UK Government’s coveted request for equivalence. The EU has indicated that this Memorandum of Understanding may open up the possibility of an equivalence agreement further down the line.
Yet three months since the end of the transition period, the City now asks itself whether equivalence is necessary at all. What was once a high priority ask has now become less of a concern having adapted to a world without equivalence post 31 December 2020. Behind closed doors, bankers now ask themselves why add more instability to our regulatory system by having equivalence when relations between the EU and UK are so fraught with politics. The risk of unilateral withdrawal at such short notice would do more to shock our financial system than help it.
Rather than simply gaining a short-sighted equivalence agreement, the UK Government must agree a financial strategy with the EU that addresses the elephant in the room: how can both sides maintain a deep and close relationship for all our financial services sectors without the UK accepting line-by-line equivalence and losing decision-making autonomy.
An outcomes-based approach, akin to the EU-US equivalence agreement, would grant the UK more scope for divergence to suit needs of our market. Already, the City is reviewing Mifid II and Solvency II requirements, potentially diverging from the EU to make changes more suited to our financial market. Additionally, the publications of the Lord Hill review on listings and the Kalifa review of UK Fintech has highlighted important areas for boosting our financial sector in the wake of Brexit. The recent findings from House of Lords inquiry on trade in services beyond Brexit concur, arguing that “long-term interest of both the UK and the EU lies in a less prescriptive policy on market access”. Whether the EU are willing to grant the UK such a prize as they seek to attract UK financial services to their shores remains to be seen.
Beyond equivalence, the Government’s financial services strategy should ensure it delivers market access for the whole of our financial services sector. Equivalence does not solve all our market access problems because equivalence only works for wholesale markets. Retail banks, insurers and insurance broking have been left out of conversations pertaining to future market access. There has to be an alternative for maintaining a strong and competitive financial system that works for all. If not, we risk prioritising some financial sectors over others. The UK Government must take a holistic view of the full sector as they seek to build upon the foundations of the Memorandum of Understanding with the EU.
How we seize this opportunity will determine the course of our long-term competitiveness. Policymakers must now heed the advice of the City and not let short term political decisions dictate our strategy. With so much at stake for the City, the real negotiations are set to begin.
Tanisha Aggarwal is Vice-Chair of Labour in the City