Andreas Dombret is a former German central bank executive and global senior adviser at Oliver Wyman
Europe’s financial services sector has unfortunately found itself caught up in the wider EU-UK disputes over Brexit, but the stalemate on finance serves neither side’s interests.
With signs that the current UK government and the EU may be moving towards a more cooperative relationship, and with the UK launching a set of regulatory reforms to boost the competitiveness of the City of London, the Policy makers on both sides of the Channel should seize the opportunity to try to break the deadlock.
The EU wants and needs a good relationship with the City of London. EU policymakers are well aware that a truly effective Capital Markets Union without the UK is much more difficult, if not impossible. Reducing businesses’ reliance on bank loans is a key aspect of a union, and it requires access to London’s deep and liquid debt, equity and derivatives markets.
Although the EU has attracted some businesses from London due to Brexit, they are spread across several locations – mainly Amsterdam, Dublin, Frankfurt and Paris. There is no EU financial center to rival London and no realistic prospect of having one in the foreseeable future.
However, the EU cannot and will not risk ceding control of its financial stability to an offshore center where it has no regulatory influence, although it wants access to the London markets.
Like it or not, the City of London is now an offshore center for the EU and, for example, the clearing of euro derivatives in London is a valid concern for EU regulators. Clearinghouses pose systemic risk and the decisions they make regarding margin requirements on sovereign exposures can have seismic implications.
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For its part, the UK lost its passporting rights and advantageous position as the gateway to the EU for international business as a result of Brexit. Yet its strengths as an international financial center remain formidable. London holds much of the financial expertise, infrastructure, many asset owners and managers, and it dominates the private and capital markets.
At the same time, the EU still accounts for a large share of the City’s business – around a third of all UK financial services exports. One would think that the UK has every interest in reaching a reasonable agreement with the EU on financial services.
Can these positions be reconciled? As an Anglophile German-American national having worked in London, New York and Frankfurt, I think it is very much in the interest of the EU and the UK to find a common solution. Otherwise, both will lose.
The fragmentation of European markets helps neither the UK nor the EU – only the other financial centres. For example, the reason companies decide to list in New York over Europe isn’t because of regulation – it’s because of the depth and liquidity of the US markets and neither the Neither the UK nor the EU can compete alone.
To find accommodation, we need open-mindedness as well as creative thinking from both sides. The UK is looking to boost the competitiveness of its financial services sector post-Brexit, moving away from EU regulation in some areas to become more attractive to international businesses.
The removal of the bonus cap is a good example. It sends a signal of intent, although in practice it will have a rather low impact. As such, it is unlikely to cause undue concern to EU regulators.
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However, if the UK government goes ahead with dramatic deregulation, weakening of prudential rules and increased political scrutiny over regulators, the EU will be very concerned. Wholesale deregulation could also be particularly risky for the UK, given the recent market turmoil.
We all have to operate in the real world, where much of the regulation of financial services is set internationally and where competition by lowering standards is a dangerous game. The big concern of EU policymakers and regulators is that the UK wants to radically change the financial landscape in order to demonstrate that Brexit was worth it.
The EU must accept the fact that Europe’s main financial center is now outside the EU and that a new and lasting relationship is needed. Politics and the issue of the Northern Ireland Protocol have stood in the way, but it is imperative to move forward with the long-promised Financial Services Memorandum of Understanding as a prelude to a binding treaty governing relationships in financial services.
This should cover the issue of euro clearing in London. With good relations between the EU and the UK in the area of financial services and appropriate mechanisms for regulatory cooperation and oversight, it should be possible to allay EU regulators’ concerns about some parts of the euro clearing that takes place in London.
Without cooperation and mutual trust, the EU is unlikely to accept the status quo.