According to an early draft of a financial services cooperation agreement between the UK and the European Union, the financial industry of the City of London would be worse off than rival New York, a document seen by Reuters shows.
The UK financial services industry has been largely cut off from the EU, its largest customer, since a Brexit transition period ended on December 31, as the sector is not covered by the UK-EU trade agreement.
For example, trading in EU stocks and derivatives has already left the UK for continental Europe.
Both sides have committed to agreeing a Memorandum of Understanding (MoU) on regular informal discussions on financial rules and market supervision by the end of March.
An early draft of this document seen by Reuters has less substance than an agreement the EU made with the United States in 2016, industry officials said.
“This is the start of a negotiation – the text proposed by the Commission is much more limited than the UK’s ambitions,” said Chris Bates, financial services attorney at Clifford Chance.
Brussels can grant direct market access to foreign financial firms if it believes their home market rules are as robust as the EU’s own standards, a system known as ‘equivalence’.
A person familiar with the UK’s negotiating position said the UK’s focus is on ensuring that the MoU provides transparency and appropriate dialogue in the adoption, suspension and withdrawal of equivalency decisions.
Currently, the EU can theoretically cancel equivalence decisions with just 30 days’ notice.
Under the US agreement with the EU, equivalence is treated as “results-oriented”.
The UK has called for EU equivalence to be result driven too, to ensure that the focus is on whether UK and EU financial rules lead to the same result.
However, no result-based equivalence is mentioned in the draft EU-UK memorandum.
The EU text is deliberately more ambitious than the US deal and doesn’t even reflect the current depth of relations with bilateral MoUs that have already been signed between individual regulators in the UK and the EU, a financial sector source said.
However, industry officials also said that even the draft document now in circulation would be a start in restoring trust between the two sides.
“It is important to create a framework for regulatory dialogue, even if there is little expectation of a movement in new equivalency decisions in the near future,” said Bates.
The financial industry would like the UK to include a provision for consultation with industry as part of the regulatory dialogue, the first source said.
“The MoU is on the lighter side of what the city wants,” said a second source from the financial sector, adding that it might make little difference as the UK is likely to get limited equivalency.
The European Commission declined to comment on the document. The UK Treasury Department had no immediate comment.
Brussels has already made it clear that even an agreed letter of intent will not automatically lead to better EU access for the London financial industry that goes beyond the time-limited permission to process EU derivative transactions.
The EU executive meets with banks on Friday to ask how they can justify continuing to settle derivatives in London.
Bank of England Governor Andrew Bailey said this week the UK will oppose any attempts by the EU to get banks to shift trillions of euros in derivatives settlement from the UK to the bloc.
Source: Reuters (reporting by Huw Jones. Editing by Jane Merriman)