For a win-win financial services Brexit deal, a reboot is needed

If the EU and the UK are each to achieve a win-win outcome in the Brexit trade talks, the EU must become more accountable politically to its own citizens.

For financial services, accountability has yet to kick in. Michel Barnier has announced that the UK cannot expect a binding arrangement to cover financial services trade, something which could have a significant impact on citizens living costs across the 27 member states. And if there cannot be such an agreement, it makes little sense for the UK to persevere in the negotiations as currently structured.

The UK should call the shots over any deal for trade in goods – it has a large trade deficit with the EU. But without services included, the result will not be two-way. To reach an acceptable deal, the UK should stop proceedings to allow member state democratic processes to operate. The UK should explain what is needed and what it would see as a “bad deal”, one pointless to negotiate, which currently seems likely.

What is the default position if there is no deal? For goods, UK consumers could redirect much of their current EU27 expenditure elsewhere to buy quality goods then subject to the same tariff costs, and any EU-facing tariffs of the UK could be used to compensate affected UK manufacturers.

Read more: One third of CFOs gearing up to relocate staff away from UK after Brexit

The UK could unilaterally apply the latest technology to keep its Irish border frictionless, leaving the EU to decide whether to establish a hard border facing the south. The provisional “phase 1” (December) agreement on citizens rights reflects what the UK would anyway declare.

And the ex gratia exit payment is just that – not owing in law. UK taxpayers might rightly ask: what is the UK to get in return for its payment? Unless the EU moves, the answer will be “not enough”.

A no deal outcome would damage the EU, but the negotiations have so far ignored the democratic forces within the EU27 which would demand a comprehensive Brexit trade deal across goods and services. The EU responds to economic facts, but only when democracy gives them voice. The recent decision to divert funding from Eastern Europe to the troubled Eurozone south reflects the urgency of ameliorating southern stagnation, particularly in Italy as the polls threaten Brussels hegemony.

So now the UK must make clear that it expects to have mutual access for financial businesses through the mutual recognition of standards. This would benefit everybody, giving EU consumers a continuation of the status quo and the lowest priced access to capital.

Read more: Davis warns of "tussle" to include City in Brexit deal

The UK chancellor has proposed a system of “enhanced equivalence”, a term derived from the existing EU notion of “equivalence”. The EU uses this concept to grant access to foreign businesses operating under foreign standards which achieve similar outcomes to those in the EU. But the equivalence laws are currently imperfect and the UK wants to implement a fuller arrangement.

The proposed deal would allow access for all financial businesses operating between the UK and EU for every business area where the regimes achieve similar high-level outcomes. When possible, the outcomes would reference international standards, the touchstone for regulation. The arrangements would be overseen by an independent court.

Can this be easily implemented?

Absolutely. This idea, which I proposed in June 2016, setting out the detail throughout 2017, involves a light-touch international treaty with relatively minor amendments to EU law itself.

Alternatively more of the detail can be put into the Brexit agreement, as has recently been suggested.

Read more: Bank of England teams up with the ECB on financial services Brexit group

The EUs negotiating team asserts no such arrangement can be established because it would give rise to systemic risk in the EU. The governor of the Banque de France alleges the UK would rush to apply lower standards, creating huge danger. This is ironic since the EU has regularly sought to prevent the UK applying its traditional approach of higher standards and fewer rules, which was the method that allowed the UK to avoid the main effects of the Wall Street Crash. The EU viewed the UKs higher standards as offering competitive advantage. In truth, enhanced equivalence would remove systemic risk, not create it.

Underlying the EUs position appears to be a desire, originating principally from France, to prevent the City from being overly competitive by not agreeing to an access deal and then seeking to control UK regulation through the EUs existing equivalence mechanics. Yet this is to pull at the shorts of the neighbouring runner in the hope of competing better oneself. The UK would just wriggle free.

This is where the EU27s democratic processes need to be given the opportunity to assist. The UK should step away from the melee and publicly explain the pre-requisites for any post-Brexit trade arrangements, refocusing the talks onto a model capable of forming the basis for a lasting agreement that both sides can support.




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