August 19, 2016
Brexit realities slowly dawning on the City
If one listens to the Brexit debates, one gets the impression of a journey that started off in Brussels, took us briefly to Norway, is now going through Switzerland, and may end up in Canada. The FT has a story out this morning according to which the City of London has effectively given up on the Norway option - Britain joining the European Economic Area - to safeguard the single passport. It is now looking for a second-best option instead. This would be the Swiss deal, which does not offer Swiss financial companies a blanket passport, but which has negotiated similar levels of access through industry-for-industry protocols. The article refers to the state of discussion of joint teams of City representatives and civil servants during the summer, which will form the basis of a proposal to Theresa May in early September.
We should note that this is a lobbying position - nothing that has been agreed with anybody in the European Council or the European Commission. We think that the reference to the so-called Swiss option is somewhat misleading, simply because Switzerland, too, needs to maintain the principle of free movement of labour. Switzerland will lose blanket single-market access once the government implements the 2014 referendum decision to impose immigration controls - which it will have to do before February 2017 unless another referendum overturns the previous one.
But, materially, what matters is that the British are moving away from the position of a single-market financial passport towards a bilateral industry-per-industry trade agreement. Switzerland has such an agreement in place for life insurance, though not for banking. The Canada FTA, currently pending ratification, does not have any financial services components, but it is conceivable that the UK negotiates an FTA that does include finance. We would classify this as a variant of the Canada deal, rather than as a variant of the Swiss arrangement.
The article also quotes one member of the task force as saying that such an agreement would require "regulatory equivalence" - meaning that the UK would need to shadow EU regulations in the sectors for which the agreements applies. The big obstacle to any such deals will be the UK's government insistence of regain control over immigration. Only with the confines of an FTA will it be possible to agree a deal where Britain guarantees certain freedom of movement rights to EU nationals, in exchange for certain freedom of movement right of capital affecting some sectors but not all.
The working group has looked in some detail at the potential impact of a cold departure from the EU, and concluded that the consequences for the City would be serious. Areas such as cross-border lending and corporate deposit-taking would suddenly be left without access to EU customers. The article says the treasury has come up with a similar assessment. There seems to be a consensus that a transitional arrangement is needed to give everyone time to prepare.