Paris opens a new front in its struggle to attract business from London after Brexit, city officials have warned.
The French are expected to put pressure on other EU Member States to fill the loopholes that Paris sees as loopholes so that UK companies can access some EU markets without broader legal equivalence agreements.
Individual EU members have their own longstanding national rules for market access, with countries like Germany and the Netherlands having much more open regimes than France.
“The concern is that Brussels will try to harmonize a more cohesive and protectionist regime like France,” said a senior city official.
Brussels has refused to reciprocate UK government measures allowing EU companies to access UK financial markets by declaring the equivalence of the rules. However, some city firms plan to apply the more liberal market access rules in countries like Germany.
Barney Reynolds, director of financial services at lawyers Shearman & Sterling, says companies can use these national rules and the “reverse advertising” technique to continue to provide some services to London clients.
“It is a mistake to see the EU as a bloc. For many practical aspects of law it is still a few individual countries, ”he says.
Alan Houmann, Head of European Government Affairs at Citigroup, said European Commission officials have made it clear that they are dissatisfied with different access conditions to EU markets that they see as “gaps” in the EU. “I have no doubt whatever is being reviewed … this is a very interesting debate to have in the near future,” he said at a City & Financial conference on the UK post-transition regulatory regime.
James Chew, Head of Regulatory Strategy at HSBC, says the lack of progress in talks on EU-wide access for UK businesses has brought bilateral access into focus. He said at the same conference that it would be difficult for the EU to harmonize these rules as the national rules are the result of relationships that have developed over many years.
According to Reynolds, there is a clear division between the relatively open northern EU countries and some southern countries led by France, which are more protectionist.
In a report for UK Finance, lawyers Slaughter and May found that “certain national licensing systems contain market access mechanisms that can, to a limited extent, mitigate some of the risks inherent in the lack of broader access agreements”. For example, investment banking sales and trading services can be largely unrestricted in Ireland, but not in France, with Germany somewhere in the middle.
Although the French could try to impose their model on the rest of the EU in hopes of doing more business, Reynolds doubts they will succeed. “In my opinion, the French will not prevail because that would not be in the interests of other Member States – or even in the longer term themselves.”
However, other city watchers are less confident and point to the very tough line that EU negotiators have taken under the leadership of former French Services Commissioner Michel Barnier.
While financial services are largely excluded from major UK-EU trade talks, the city had hoped that EU regulators could put in place some regulatory equivalence provisions before the end of the transition period. However, EU officials have made it clear that they will not do most equivalency assessments before the end of the year, arguing that the UK has not provided enough information on plans to deviate from EU rules in the future.
Chancellor Rishi Sunak recently announced equivalence decisions that will allow UK clients to use EU-based exchanges, clearing houses and benchmarks. However, EU action has been limited, which Katharine Braddick, head of the Treasury’s financial services division, has described as “unfortunate.”
The Commission has declared the three UK clearinghouses used to trade derivatives to be equivalent for 18 months and EU regulators have made some more concessions to avoid chaos in derivatives markets. However, Brussels has still not announced that it will allow EU companies to use stock trading platforms in the UK. As a result, Goldman Sachs has just announced that it will open a trading center in Paris to serve its EU customers.
The city hopes the EU will make some additional concessions before the end of the year to minimize disruption. But it is the result of trade talks that will be more important to the city in the longer term, even if they have little direct impact on financial services.
City officials fear that a no-deal outcome would severely affect relationships, making it more difficult to reach agreements on regulatory equivalence. It could also help French efforts to convince other Member States to change their national rules and pull up the drawbridge.
David Wighton is a columnist for Financial News