Two years ago, one City practitioner reminded me that the new deal agreed between London and Brussels on financial services was a “nothingburger”.
This sad sandwich, a text that was agreed but never signed, ended up being frozen because of its relationship with the Northern Ireland protocol. Now it looks like it will be melted, reheated and served again. Sekeca!
It is progress that the relationship between the UK and the EU can move from the type of direct hostility that prevents any meaningful dialogue at all to something a little more constructive. The Windsor Framework, which aims to end the bitter dispute over Northern Ireland’s place in the post-Brexit order, could unlock movement on other fronts, including a memorandum of understanding on financial services.
But it is very difficult to be very happy. The text agreed two years ago is only the basis for official discussions, with the aim of exchanging information every six months. This has always been a political forum in two ways: UK regulators already have bilateral channels with their counterparts; policymakers in Brussels have made it clear that this step is an obstacle that must be removed before discussions on anything can begin, which is a regulatory equality decision that could reduce cross-border activities in financial services.
Both sides are close to having an “official talking shop” in the words of one former senior Brussels official, who sees the possibility of this translating into a close change in access or cooperation as “doubtful, very doubtful”. Equivalence decisions are technical and time-consuming. However, notes Thomas Pritchard in Sutherland’s Eversheds, “the political aspect is enormous”: the thawing of relations unlocks the hope of progress, if not progress itself.
Hope is good, especially as it’s a rather bleak time for London. Building materials group CRH wants to break the British market for the US, where it sees a lot of growth in the future. Betting company Flutter is considering the same option; the Ferguson plumber has left. Other listed companies will be selected by private equity. The number of listed companies has fallen by more than 40 percent over the past 20 years, think tank New Financial said, and the UK’s share of global initial public offerings has fallen from 13 percent to less than 4 percent.
This has nothing to do with Brexit. The continued discount of the UK equity market, which opened after 2016 and peaked in 2019 at the height of the Brexit chaos according to investment bank Panmure Gordon, may not help against higher valuations in the state. But the allocation of British pension money and other long-term capital to British (or indeed all British) equities predates the European divide and is widely seen as the basis for London’s difficulties. The shift of some businesses and trading assets to continental Europe is unrelated to the increasingly clear UK stock market.
Pinning too much importance on the renewed relationship with Brussels can actually not help. For the beginning of the finance industry, restructured and reshaped for access where it is necessary, has moved on. Never saw equality as an attractive basis for business in the first place. It is also noted how little even of the government’s recipe for the thriving future of the City is concerned with Europe at all: only half of the renovation of Edinburgh has anything to do with the continent, notes New Financial.
This is good news. This means that the blueprint for financial regulatory reform is not the kind of dismemberment that can cause horror across the Channel. But what is surprising is how few of these proposals are at an advanced stage: indeed, about half of the steps involved a new or similar consultation. More fundamental reforms, especially in the area of capital markets and pensions, are largely domestic in nature and have not been taken seriously.
It can’t hurt if the relationship between the UK and Brussels comes in from the cold. But when it comes to London priority should light the fire in their own reform efforts.
helen.thomas@ft.com
@helentbiz