Europe’s financial sector has reached “peak uncertainty” as regulators and banks rush to stave off the harshest effects of the UK leaving the single market with just 36 days left before the end of the Brexit transition period.
A combination of politics around trade talks, EU concerns about Britain diverging from continental rules and Europe’s push for greater control of euro-denominated activities has left the sector facing unanswered questions about its operations after January 1.
With both sides refusing to give ground on vital issues and financial services left outside the scope of Brexit talks, executives fear the lack of clarity could lead to market dysfunction and inflated costs for clients after a year in which coronavirus has taken its toll.
“This is the period of peak uncertainty,” David Schwimmer, chief executive of London Stock Exchange Group, told the Financial Times.
“It looks like the EU will make sure there is a cost to Brexit, but it’s really important for global business to be able to participate in the biggest markets,” he said. “Less fragmentation and more co-operation and continuity of service are in everyone’s interest.”
Unlike most other main economic sectors, financial services has largely been left out of trade talks about the EU and UK’s future relationship, despite its importance to the British and European economies. The EU rejected UK proposals to include a detailed financial services chapter, covering issues such as regulatory co-operation, in any trade deal, arguing that it might turn into a British attempt to retain market access by the back door.
The exclusion means banks, exchanges and other parts of the City — as well as international lenders with trading outposts in London — are counting on a series of ad hoc, last-minute arrangements and changes.
“Some firms have plans in place already but there are many who think something will come along at the last minute,” said Sam Tyfield, a partner at law firm Shoosmiths in London.
Goldman Sachs said on Tuesday it would set up a hub in the Paris for Sigma X, its private marketplace for trading shares, to ensure it can continue trading European equities if there is no accord.
The same day, real estate investment trust Segro dual-listed its entire share capital on Euronext Paris to protect its holding structure after the end of the Brexit transition period.
Those contingency plans were announced in the same week that European regulators also finalised a late change seeking to avoid chaos in £15tn of derivatives contracts held between UK and EU counterparties.
Concerned that Britain would seek ways to preserve the benefits of the single market after Brexit, the EU has insisted that future relations be based on market-access rights, known as equivalence decisions, that each side would grant unilaterally. It is a system that the bloc uses with other financial centres such as New York and Singapore.
However, there has been silence from Brussels about which equivalence decisions the City can expect to be granted. EU officials acknowledge that, despite equivalence being formally separate to the future-relationship talks, the two issues are politically connected. Brussels is deeply reluctant to show its hand while trade talks are undecided, not least because of the complicated politics of acting while the fate of sensitive EU sectors, such as fisheries, remains uncertain.
“What many in the City fear is the bad will created by crashing out without a deal,” said Pat McFadden, shadow City minister. “Deal or no deal, for them it is really a question of goodwill because they are depending on it for access [to European markets].”
The European Securities and Markets Authority (Esma) said on Wednesday that it would not soften EU rules for parts of the derivatives market, despite the possibility that they could leave London outposts of EU banks unable to trade. Both Esma and the UK Financial Conduct Authority said the issue could be fixed by equivalence decisions, but that this was outside their purview.
“For the European banking industry it isn’t the end of the discussion, but we knew the solution wouldn’t come from Esma,” said a senior executive at a European bank. “It will go to the wire. We’re expecting to hear something concrete from the European Commission near the end of the year.”
The EU has also repeatedly warned about the difficulty of assessing UK equivalence given the dynamic situation created by Brexit, in which Britain has made clear that the goal of leaving the EU is to break free from European rules.
Some are encouraging the UK to embrace divergence and roll back some of the more prescriptive rules introduced across Europe after the financial crisis.
“The reason we’ve invested in the UK for so long is that it’s the centre of global markets and the UK regulators have a deep understanding of the importance of frictionless access to them,” said Ben Jackson, president of Intercontinental Exchange.
“There's an opportunity for the UK to stand up and focus back on what made their market successful, namely principles-based regulation,” he said.
Additional reporting by Owen Walker in London.