The leaders of the EU have replied to the UK’s position voiced by Theresa May in recent days. Unfortunately for the UK financial industry, the response is far from positive. According to Brexit negotiation guidelines from the European Council, the stance of the EU is not favoring the current position of the UK’s Prime Minister.
The EU is rejecting the UK’s plans for a post-Brexit trade relationship that includes financial services. Such a deal does not appear to be in the interests of the EU, and the document calls the stance of the UK “cherry picking”.
The hard line taken by the EU’s political elite contradicts the stance of May, as she laid out a plan that includes access to the single market for the UK’s financial services firms.
EU Wants All or Nothing
The position of the UK is akin to a soft Brexit, a position that is unlikely to find enough supporters among the ranks of the UK Conservative Party. The document circulated by the European Council indicates that it intends to force the UK to leave the customs union and the single market altogether, although the paper officially states that flexibility is on the table.
The EU wants tariff-free and quota-free trade and no “cherry-picking” or “partial participation” in the single market, which is the position that May has taken. Financial services will only be included with restrictions, but “the EU is ready to change its position if the U.K. rubs out its red lines.”
“The above approach reflects the level of rights and obligations compatible with the positions stated by the U.K. If these positions were to evolve, the Union will be prepared to reconsider its offer,” Bloomberg quotes the document.
Elaborating On Financial Services
The guidelines defend the EU’s position – that UK banks won’t get the access hinted at by the British government in recent days. According to the document, financial services may be provided under “host state rules”. This includes the right of establishment for the providers of the services.
The UK’s FCA has stated repeatedly that it is committed to adopting all new EU regulations at a time when the Brexit negotiation process is heating up. The British government’s current position is for full acceptance of all provisions made under MiFID and MiFiR. This position could be sharply reversed should the rift between both sides of the English Channel widen.
The UK could sharply shift its position and pledge to lower taxes and/or regulatory burdens for financial institutions. The risks surrounding a hard Brexit will make life difficult for both parties, as London’s status as a financial center is uncontested, and many large European cities are racing to re-house financial firms.