Boris Johnson has admitted that the Brexit trade deal failed to meet his ambitions on financial services, as Brussels signalled that the City of London must wait until after January 1 to learn what market access it will have in future.
The Johnson government intends to set out its plans for how to use Britain’s new regulatory freedom to diverge from the bloc’s rules — including on financial services — but has yet to provide details. The two sides’ new trading relationship will take effect on January 1, assuming the treaty is passed by the UK parliament next week and EU approval processes proceed smoothly.
Mr Johnson told the Sunday Telegraph that the 1,200 page treaty “perhaps does not go as far as we would like” on financial services. But the prime minister added there were provisions for some parts of the services sector, including “access for solicitors, barristers” and a “good deal for digital”.
Chancellor Rishi Sunak said on Sunday that the UK would seek to “do things a bit differently” on financial services after it had left the single market but added he was hopeful both parties would work together.
“This deal also provides reassurance because there’s a stable regulatory co-operative framework mentioned in the deal,” he told journalists. “I think that will give people that reassurance that we will remain in close dialogue with our European partners when it comes to things like equivalence decisions.”
But Brussels has made clear the UK will need to wait until after January 1 to learn what market access rights its financial services companies will have in future, warning that they will hinge on how far Britain diverges from EU standards.
“A series of further clarifications will be needed [from Britain], in particular regarding how the UK will diverge from EU frameworks after 31 December,” the European Commission said in an explanatory document on the trade deal issued on December 24.
“For these reasons, the Commission cannot finalise its assessment . . . and therefore will not take decisions at this point in time. The assessments will continue,” it said.
The EU and UK have agreed that decisions on access to each others’ markets in financial services will be based on each side declaring unilaterally that the other side’s regulatory systems are “equivalent” to its own.
The equivalence system — which Brussels already uses with other non-EU financial centres — does not cover all financial services and allows access rights to be withdrawn at just 30-days’ notice.
But Brussels’ refusal to take decisions now means that Britain is set to begin its new relationship with the EU with fewer equivalence rights in place than other financial centres, such as New York and Singapore, meaning the UK will have to rely on more cumbersome and limited access arrangements.
Britain granted the EU rights in a number of areas in November, but Brussels has only taken decisions concerning temporary rights in areas deemed vital to financial stability, such as access for European banks to UK clearinghouses.
Brussels will grant equivalence rights “when they are in the EU’s interest,” the bloc said in its December 24 statement.
The UK had hoped to secure provisions in its trade deal that would add more stability to the equivalence system. It wanted to at least replicate provisions in the EU’s deal with Japan, which foresee consultations and advance warning before equivalence is withdrawn.
But according to EU officials this was rejected out of concern that the UK would make it as hard as possible for Brussels to revoke equivalence.
Instead, the two sides will hold talks in early 2021 aimed at drafting a memorandum of understanding on future co-operation on financial services policy, with the aim of agreeing a text by March. However, the memorandum would not have the same legal force as an international treaty.
“This agreement was never going to do much in terms of financial market access,” said Sam Lowe of the Centre for European Reform. “It’s less than [what is] in the EU’s Canada and Japan agreements,” he added.
Britain’s financial industry still hopes for a closer relationship with the EU in future. After the deal was announced, Bob Wigley, executive chair of the trade body UK Finance, said: “It will be important to build on the foundations of this trade deal by strengthening arrangements for future trade in financial services.”
Mr Johnson said the UK would seek to make the most of its regulatory freedom to develop other parts of the economy. “We can’t sort of suddenly decide that we’re free and then not decide how to exercise it. This government has a very clear agenda to unite and level up and to spread opportunity across the country,” he said.
Additional reporting by Philip Stafford