The Financial Services Landscape After Brexit: A Confrontation Between EU and UK

The United Kingdom (UK) and the European Union (EU) continue to grapple with the implications of a no-deal scenario for financial services. While the EU is willing to grant certain equivalency to the UK for limited operations, such as Central Counterparties (CCPs), the UK is reluctant to accept the EU's demands. This article explores the ramifications of this impasse for both parties, leveraging insights from past precedents and international trade agreements.

The Case of US CCPs and EU Regulations

One major point of contention is the EU's treatment of US entities regulated by the Securities and Exchange Commission (SEC). The EU grants equivalency to these entities, allowing them to apply for recognition by the European Securities and Markets Authority (ESMA) and perform CCP services. Crucially, the SEC can only grant equivalency under the regulatory framework that existed at the time of assessment. The EU wants the UK to adhere to a similar principle, which the UK finds restrictive.

The UK rejects this condition, insisting that it must have control over its own regulatory framework. This situation highlights the EU's stance of exerting control over the City of London, a position strongly opposed by the UK. The EU's refusal to grant full equivalency unless the UK agrees to these terms underlines the complexity of the negotiations.

EU's Gains vs. UK's Losses

The financial services industry in the UK is a significant contributor to the government's tax revenue, accounting for over 300 billion pounds annually. Without a deal, the UK risks losing a substantial portion of this income. Meanwhile, various EU nations and the US have attempted to gain a larger share of this market. Brexit appears to have provided them with an opportunity to do so.

From the EU's perspective, the UK's no-deal scenario presents an opportunity to regain control and influence over the City of London. This could also provide the EU with cheaper loans, a strategic goal they have been pursuing. However, the UK prefers to maintain its independence, believing that involvement with the EU could result in financial instability due to the large-scale printing of euros and the interconnectedness of European banks.

UK's Sovereignty and Future Regulatory Framework

The UK's position is clear: it wants more access than just for CCPs, which is not feasible under the current EU provisions. This highlights the UK's desire for sovereignty in setting its own regulatory framework. The EU's request for sight of the UK's future regulatory framework is viewed as an attempt to anticipate and potentially restrict future changes.

The EU's strategy is rooted in the belief that financial services are too crucial to be left to other nations. However, the UK argues that its financial services sector is too large for domestic consumption alone and needs to be able to export to other markets. The EU's reluctance to grant full equivalence, even conditionally, underscores the divide between the two entities.

Towards a Crunch Point

As negotiations intensify, it seems clear that the UK will not yield to the EU's demands. The EU's refusal to grant full equivalence unless certain conditions are met is seen as a form of bad faith, violating WTO rules. This situation is likely to escalate, with the UK potentially representing the EU's actions as a breach of fundamental trade rules. Sanctions could be a last-resort measure if negotiations fail.

In conclusion, the no-deal scenario for financial services presents a significant challenge for both the UK and the EU. The UK's insistence on sovereignty and full access to financial services markets is at odds with the EU's desire for control and influence. The situation is complex and fraught with geopolitical and economic implications, making it a pivotal moment in the UK's and EU's future relationships.