British finance minister Philip Hammond said yesterday that financial services should be at the heart of a new trade deal and the European Union should drop its tough stance on limiting the sector’s market access after Brexit.
In a rebuff to Britain, the EU’s draft guidelines for a trade deal released on Wednesday will only offer financial services firms in London a limited ability to sell many of their services to European companies.
But Mr Hammond said the EU had sought to include financial services in other trade agreements in the past, and it made no sense to exclude them from the Brexit deal that London and Brussels are due to hammer out in the coming months.
“It is hard to see how any deal that did not include services could look like a fair and balanced settlement,” Mr Hammond said in a speech at HSBC’s headquarters in Canary Wharf, home to some of the world’s largest financial firms.
“So I am clear not only that it is possible to include financial services within a trade deal, but that it is very much in our mutual interest to do so.”
London vies with New York as the world’s financial capital, dominates global foreign exchange, hosts the largest commercial insurance market and more banks than any other centre, something Hammond said helped EU companies and consumers.
Gibraltar has deep ties to London’s financial services market, making these developments important to the Rock too.
The future of London as Europe’s financial centre is one of the biggest issues in Brexit talks because it is Britain’s largest export sector and biggest source of tax. Rival cities within the bloc are battling to draw highly-paid banking jobs and the revenues they bring.
Mr Hammond 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.
The proposals are the most detailed yet from the government on how a long-term agreement on financial services with the EU might work after Brexit, more than 20 months after Britain voted to leave the EU.
“The United Kingdom cannot automatically be a rule-taker,” Mr Hammond said.
“We cannot sign up to automatically accept as-yet unknown future rule changes. We must have the ability if necessary, to deliver an equivalent outcome by different means.”
The EU’s draft guidelines are seen by Britain as a starting point from a skilled negotiator in trade agreements, he said.
“It does not surprise me remotely that what they set out this morning is a very tough position,” Mr Hammond said.
The Confederation of British Industry’s deputy director-general Josh Hardie backed the Chancellor, saying “trying to forge a new trading relationship with our largest trading partner that does not include financial services is like building a ship with no sails”.
UK Finance chief executive Stephen Jones said: “A framework based on close supervisory cooperation and mutual recognition would be a win-win, benefiting the businesses and customers across the continent who rely on UK financial services.
“Firms now want to see swift agreement on the transition period, to provide much-needed certainty and allow us to focus on reaching a mutually beneficial trade deal.”
The draft guidelines published yesterday made no explicit mention of Gibraltar but referred to earlier negotiating positions that included the controversial Spanish veto, adding that these still applied.
The EU yesterday offered Britain a free trade agreement for their post-Brexit relationship that fell well short of ambitions set out by Prime Minister Theresa May last week, notably for the key financial sector.
A draft position of the remaining 27 EU members said the bloc was determined to foster a close partnership with Britain, but its depth would be limited by Britain’s own wish to leave the EU’s single market and customs union.
“Because of Brexit, we will be drifting apart,” the chairman of EU leaders Donald Tusk told a news conference, delivering a message that contrasted sharply with May’s call for future trade to be “frictionless as possible”.
“In fact, this will be the first free-trade agreement in history that loosens economic ties instead of strengthening them. Our agreement will not make trade between the UK and the EU frictionless or smoother. It will make it more complicated and costly than today for all of us,” he said.
Crucially, the bloc said Britain would be treated like any other third country when it came to financial services – which London had pressed to be included in a future free-trade deal.
Financial services generate more than 10 percent of Britain’s output and are the only area in which Britain has a trade surplus with the EU, making London very keen to preserve its banks’ current access to continental Europe.
But the text said in the future, Britain’s financial firms would only be allowed to operate in the EU “under host state rules” and be treated according to “the fact that the UK will become a third country and the Union and the UK will no longer share a common regulatory, supervisory, enforcement and judiciary framework.”
The draft EU guidelines, which will be worked on by EU diplomats to be approved by the bloc’s 27 national leaders in late March, say services will indeed be part of the deal, but spell out clear limits of what can be on offer.
“Such an agreement cannot offer the same benefits as Membership and cannot amount to participation in the Single Market or parts thereof,” the text read.
“Like other free trade agreements, it (the trade agreement) should address services,” Mr Tusk said.
“(But) No Member State is free to pick only those sectors of the Single Market it likes, nor to accept the role of the ECJ only when it suits their interest,” he said.
“By the same token, a pick-and-mix approach for a non-member state is out of the question. We are not going to sacrifice these principles. It’s simply not in our interest,” he said.
Last December the Bank of England proposed allowing EU banks in Britain to continue as branches in London after Brexit – on condition of some form of reciprocity from Brussels – to avoid lenders having to find extra capital to become fully fledged subsidiaries.
Instead, the EU proposal sticks with the bloc’s traditional approach to dealing with banks from non-EU or third countries.