European Commission officials have rejected the City of London's proposal to strike a post-Brexit free-trade deal on financial services, a major blow to Britain's hopes of keeping full access to European Union markets for one of the world's top two financial centres.
Since Britain voted to leave the EU 19 months ago, some of the world’s most powerful finance companies in London have been searching for a way to preserve the existing cross-border flow of trading after it leaves the bloc in 2019.
Commission officials told British financiers in meetings in recent weeks that they will not agree to a deal that would allow finance companies to operate in each others’ markets without barriers because Britain has said it will leave the single market, according to two people who attended the meetings.
The City’s plan proposed that Britain and the EU would allow cross-border trade in financial services on the condition that each side preserve regulatory standards in line with the best international standards. This model would be maintained by close co-operation between regulators and financial policymakers.
Detailed proposals
The proposals were the most detailed on how a long-term agreement on financial services with the EU may work after Brexit, with papers setting out how a pact could be structured and policed, and it has been endorsed by Britain's Brexit minister David Davis.
But EU officials are dismissive of any trade models that would see Britain retain similar levels of market access while leaving the single market regime.
“They have made it very clear to us that this is unacceptable to them,” said one senior British finance executive present at one of the meetings. “This was our best and frankly only proposal. We don’t have a plan B.”
Sterling slipped against the dollar and euro on Wednesday on news of the rejection.
Britain’s vast financial services sector looks set to be one of the most divisive areas in the Brexit negotiations, with Britain demanding a generous deal while the EU refuses to shift from its insistence that Britain’s red lines – such as ending the free movement of workers from the EU – make that impossible.
Britain is currently home to the world’s largest number of banks and hosts the largest commercial insurance market. About €6 trillion, or 37 per cent, of Europe’s financial assets are managed in the UK capital, almost twice the amount of its nearest rival, Paris.
In addition, London dominates Europe’s €5.2 trillion investment banking industry.
But unless it can secure a trade deal, for all its geographic proximity, Europe's largest financial capital will end up adrift with the same access to the EU as other countries such as Singapore.
Britain's chancellor of the exchequer, Philip Hammond, warned Europe last week that hurting London's financial centre would push business to New York and Singapore to the detriment of Europe as a whole, and he called for a bespoke trade deal with the EU.
Passporting
The rejection of the proposed trade deal represents a second setback for the City of London, which had initially pinned hopes on Britain maintaining "passporting" in financial services after Brexit.
EU negotiators see no room for discussion with Britain on passporting, diplomats in Brussels said on Wednesday.
Mark Hoban, a former City minister who chaired the body that wrote the blueprint, acknowledged it was ambitious but said it has the interest of government and was being discussed by EU states.
“There is agreement that the existing third country regime does not provide a robust basis for maintaining high levels of trade,” Mr Hoban said.
The commission did not immediately respond to requests for comment.
A lawyer who helped negotiate the last implemented trade deal with the EU also said he thought Britain should temper its expectations for securing a wide-ranging deal on financial services.
Christophe Bondy, the senior legal counsel during Canada's negotiations for a trade deal with the EU said Canada worked very hard to achieve a high-standard trade deal with the EU but still ended up with modest outcomes in financial services.
“There was a lot of effort put into financial services,” he said. “It was one of the areas that went on the longest in the negotiation.”
Mr Bondy said that if the EU granted Britain’s financial services sector access in line with the City’s blueprint, the EU’s other free-trade agreement partners such as Canada would have to be offered access to the same deal.
“It blows the lid off how the EU functions,” Mr Bondy said. – Reuters
