The European Union late last week dealt a major blow to the UK's financial services sector in the lead up to Brexit, after negotiators rejected the plans for the sector laid out by the British government in Prime Minister Theresa May's controversial white paper.
According to a report from the Financial Times, the EU's chief negotiator Michel Barnier, last Friday told EU ministers that the financial services elements of May's Brexit plans could not be accepted as they threatened to rob the bloc's "decision-making autonomy" when it comes to finance.
The UK, earlier in July, proposed a new relationship between the highly interconnected financial services sectors of the UK and the EU that would involve a system of so-called "equivalence."
Under the plans in the white paper, the government said it will seek to improve on existing requirements for equivalence of rules between the EU and outside countries.
Equivalence is a framework whereby the EU acknowledges that the legal, regulatory and supervisory regime of a non-EU country is as good as its own, and therefore allows that state access to the financial services sector within the bloc. Countries like Singapore and the USA already use a similar system to trade financial services with the EU.
Those rules, however, in the government's eyes, are "not sufficient to deal with a third country whose financial markets are as deeply interconnected with the EU’s as those of the UK are." Therefore, the white paper sought to use those rules as a basis for a deeper arrangement between the two countries.
Barnier, however, is said to have rejected this idea out of hand, saying that such a scheme would not allow the EU to unilaterally make decisions about equivalence, something it wishes to do.
Barnier is reported to have said that the UK's proposals amount to a "system of generalised equivalence that would in reality be jointly run by the EU and UK."
This rejection is likely to be a major blow for the British government, which has already scrapped one set of proposals for the future financial services relationship after it was said to be too ambitious.
Previously, May and Chancellor Philip Hammond had favoured mutual recognition — which would have meant the UK recognising EU regulations around the financial services industry, and the EU doing the same with the UK, with both sets of rules closely aligned.
Even before Barnier's rejection of them, the proposals have caused division, largely within the City itself, with some lobby groups fervently against the plans, and others giving their backing.
"Today’s Brexit white paper is a real blow for the UK’s financial and related professional services sector," the City of London's policy chairman Catherine McGuinness said in a statement the day of the white paper's release."
"With looser trade ties to Europe, the financial and related professional services sector will be less able to create jobs, generate tax and support growth across the wider economy. It’s that simple," she added.
On the flipside, the Association for Financial Markets in Europe welcomed the proposals.
"We hope that this will form the basis for negotiations to progress, recognising the importance of minimising fragmentation, maintaining financial stability and close supervisory cooperation," a statement from chief executive Simon Lewis said.
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