EU Will Reap Benefits of London Staying Strong Financial Hub After Brexit: Opinion

By The Editors, Bloomberg Opinion | January 17, 2018

Last week, the U.K. government asked German business leaders for help in securing a good deal with the European Union on financial services. The request deserves to be taken seriously. Europe’s businesses have much to gain from keeping London as a thriving financial center.

The City is by far the most significant financial hub in Europe. In 2016, the U.K. accounted for more than three-quarters of the EU’s foreign-exchange turnover, 85 percent of its hedge-fund assets and nearly a third of its equity-market capitalization, according to a recent report by the European Parliament.

Some in the EU-27 see Brexit as a chance to lure away parts of this business — and they’re right. Yet it won’t be easy to replicate the wealth of expertise which the City has built up. In addition, some of London’s financial infrastructure — its system for clearing derivatives, for instance — is complex and delicate. Relocation will be risky, especially if it has to be done abruptly. The City’s customers in the EU have an interest in minimizing this disruption.

[Insurance Journal editor’s note: The European Union currently has 28 members, including the UK. EU-27 countries are the 27 other EU countries involved in Brexit negotiations with the UK.]

To be sure, the U.K. government can’t expect business as usual for the City. When the U.K. leaves the single European market, as Prime Minster Theresa May has said it will, banks and insurers located in the U.K. will lose their automatic “passports” to operate anywhere in the EU. Many financial-services companies would like to stay in London, but won’t be able to once those permissions are lost: The EU-27 accounts for a large part of their revenues.

Still, a compromise ought to be possible. Britain and the EU-27 could agree on some form of regulatory “equivalence” — under which the EU would recognize that the U.K.’s rules are as good as its own. The idea isn’t new: Europe already applies the principle of equivalence in its financial-services dealings with other non-EU countries. To be of much use for London, equivalence would need to be extended to new areas of business — but there’s no reason why that shouldn’t happen. This would give U.K. financial-services firms partial access to the EU market, serving the interests of the U.K. and the EU alike.

The move would still be far from painless. Partial access to the European market is still just that — partial. Britain might have to accept some rules without having any say, and wouldn’t be able to let its financial rules diverge much from Europe’s in future.

For London, and for the City’s EU customers, all this would fall a long way short of simply remaining in the EU and its single market. But a deal along these lines would be vastly better than none, and not just for Britain. Europe, too, has in interest in coming to terms.

–Editors: Ferdinando Giugliano, Clive Crook.

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