From: Mark Boleat
Sent: Wednesday, 12 October 2016
Subject: Policy Chairman’s Brexit Update

A brief follow up from my update to Members last month on Brexit developments.

As with the issue of passporting, much has been written on the issue of regulatory equivalence in recent weeks. I set out below some notes to help provide some detail and context for this important issue, as well as an update on Jeremy Browne’s meetings in Ireland and Lithuania and scheduled visits for October.

These issues were right at the front of guests’ minds at the City of London Corporation annual reception in Brussels, which I spoke at on Monday evening along with IRSG Chairman Mark Hoban, and again at two related Brexit events hosted by the Corporation in Brussels and London on Tuesday. Attached is a copy of Mark Hoban’s speech.

I have also included details of Oliver Wyman’s research, commissioned by TheCityUK and published last week, on the potential impact of Brexit on UK financial services which I hope is useful, along with a short note on key points from the Conservative Party conference.


  • Equivalence:The current EU equivalence regime allows for institutions in non-EU countries to provide certain financial services in the EU, on the condition that the regulatory regime to which they are subject is deemed by the EU to be equivalent to that of the EU.  It is not a satisfactory replacement for the rights conferred by membership, because it covers only some financial services, is given at the discretion of the EU and would require the UK to follow EU requirements, but without any say in those requirements. A negotiated equivalence deal between the EU and the UK could provide a better outcome.
  • Jeremy Browne, the City’s Special Representative to the EU recently visited Ireland and Lithuania. Key points:
    • The biggest concern in Ireland is the potential ramifications for relations between Northern Ireland and the Republic of Ireland;
    • The Irish also have the most to lose economically from a difficult Brexit;
    • Ireland is also concerned, as are all ‘like-minded’ countries, by the implications of Brexit for the future direction of the EU27;
    • Dublin will attract some business from the UK, but the Irish are realists: they are alert to the possibility of marginal gains rather than expecting a transformation of their position. They are aware too of the smaller but still relevant factor of the potential loss of the ability of Irish financial services businesses to ‘passport’ into the United Kingdom market;
    • In Lithuania, there was concern with the UK leaving the EU, as both countries are instinctively ‘free market’, but Lithuania is also committed to being ‘a good European’.
  • Oliver Wyman report:  commissioned by TheCityUK, Oliver Wyman has published a report on the potential impact of Brexit on UK-based financial services. It looks at different scenarios of potential regulatory arrangements between the UK and the EU27 and what the impact would be on jobs, tax and industry revenues.

It estimates that a Brexit where the UK is outside the European Economic Area, but delivers passporting and equivalence – allowing access to the Single Market on terms similar to those that UK-based firms currently have – will cause only a modest reduction in UK-based activity. In this scenario, revenues are predicted to decline by up to £2BN (2% of total wholesale and international business), 4,000 jobs would be at risk, and tax revenues would fall by less than £0.5BN per annum.

Under conditions where the UK moves to a third country arrangement with the EU, without any regulatory equivalence and its relationship with the EU is defined by terms set out under the World Trade Organization, up to 50% of EU-related activity (£20BN in revenue) and an estimated 35,000 jobs could be at risk, along with £5BN of tax revenues per annum.

  • Conservative Party Conference: Theresa May announced in her speech to conference that there will be “no unnecessary delays” in invoking Article 50 – “We will invoke it when we are ready.  And we will be ready soon.  We will invoke Article Fifty no later than the end of March next year.”

Policy Issue – Equivalence
Equivalence, in EU law, is a judgement by the EU authorities that the regulatory system in respect of a particular service or product of a country outside of the EU (called a ‘third country’) is equivalent in its intent and outcomes to EU rules. This can be the basis for reciprocal preferential market access rights into the EU for firms whose home regulator is not in the Single Market, or for EU firms operating in those markets. These can be lost if the two regimes diverge for any reason.

If the UK chooses to adopt ‘third country status’, i.e. be outside the Single Market, it might be possible that some services could still be delivered from the UK by having equivalence. But it would be a much narrower and restricted range of services than are available as an EU Member State. The following frameworks provide examples of equivalence which are of most importance for City institutions:

  • Cross border rights for UK-based investment firms under the third market access regime;
  • Potential cross border access for Alternative Investment Funds to the Single Market via the proposed third country market access regime;
  • Potential mutual recognition of EU and UK market infrastructure for clearing derivatives; and
  • Potential mutual recognition of data protection standards and freedom to move client data between the two jurisdictions.

The arrangements do not cover most banking and insurance products and services.

Rights based on ‘equivalence’ are inherently risky, as they can be withdrawn within 30 days if a party considers that the other party’s regulatory regime no longer provides equivalent outcomes. It is possible that the EU and UK could develop a new form of bilateral third country agreement that reflects the unique level of alignment in the two sides’ regulatory approaches. The EU has a similar agreement with Switzerland, which gives Swiss insurers rights to operate branches in the EU as if they were EEA firms. In return, Switzerland commits to maintain regulatory standards equivalent to the EU.

Such agreements could be based on formal equivalence agreements between the two sides, or on the understanding that each side operates high and robust standards. This is easiest to agree for corporate banking or certain services to professional investors, but could also cover asset management, payment services or other banking services.

Because there may be a period of time between the UK’s departure from the EU and a possible EU-UK agreement (while the UK reconfirms its status in the World Trade Organisation), some institutions believe it will be vital to agree a transitional agreement that confirms temporary rights and obligations in both directions. This would require a clear commitment by the UK to the EU that before the withdrawal agreement comes into force, the UK would continue to implement all new EU regulations. It is partly to provide for equivalent status that the finance industry is not seeking any move away from existing EU requirements.

Initial assessments suggest relying on equivalence arrangements would be a big problem for banking. The BBA’s Anthony Browne has written an article here: on passporting for the ConservativeHome blog which includes a clear and vivid expression of the importance and potential impact of equivalence. As below…

We are told that in any case the EU’s “equivalence regimes” effectively grant rights as good as passporting to third countries. If only! The equivalence regimes are not an adequate substitute for passporting, to such a degree that banks have made clear it wouldn’t stop them relocating activities. Equivalence regimes only cover a narrow range of services – there is for example no equivalence regime for corporate banking, including deposit taking and lending. The equivalence regime is granted by the European Commission, a process that can take many years and can be subject to political whim. Equivalence can also be withdrawn unilaterally by the EU at just 30 days’ notice. It would mean that we would be likely to have to adopt any new EU regulation, because if we didn’t adopt it they could claim we are no longer equivalent.

The same applies to insurance.  The London Market Group (representing the wholesale insurance industry, including Lloyds) has said, “Equivalence under Solvency II does not give market access rights and is not an alternative to passporting”.  The Group also said: “Losing these [passporting] rights could be seriously damaging for the London market and detrimental for EU customers wanting to access the global expertise in London.”

Payments would also be affected, as well as services relating to credit provision and credit cards.

Technical assessments of equivalence are performed by the European Commission on the basis of technical advice from European regulatory authorities. As policymakers explained at Tuesday morning’s Brexit breakfast event in Brussels, this process is as much political as it is technical, with significant scope for equivalence to be withdrawn or not granted even where technical standards have been met.

Equivalence is specific to products and services, rather than generally applied to whole institutions, markets or countries. This is one of the reasons why financial institutions’ positions on equivalence vary greatly, depending on individual companies’ own structure and legal arrangements.


Special Representative to the EU – visits to Member States
Jeremy Browne visited Ireland on 28-29 September, meeting with representatives from the Prime Minister’s Office, Finance Ministry, Foreign Affairs Ministry, trade associations and think-tanks, as well as meetings with several business practitioners. Following is a summary of his report, with the long form reports attached.

The implications of Brexit for Ireland are numerous and serious; there is no other country where the impact is greater. They also have distinctive considerations which will inform their perspective on the negotiations.

Their biggest concern is the potential ramifications for relations between Northern Ireland and the Republic of Ireland. That trumps everything else, including even macro-economic impact assessments. There is anxiety about the nature of the border and whether the existing free flow of people and goods will be impeded.

The Irish also have the most to lose economically from a destructive Brexit. 14% of Irish exports are to the UK, but in some sectors it is considerably higher (for Irish owned companies it is 44%).

The other subject raised frequently is whether Dublin is well placed to capitalise on any movement out of the City of London. Our sense is maybe – but there is quite a subtle dynamic of factors. The Irish government has said it sees the interests of Dublin in financial services as being compatible with, not hostile to, those of London. Their scale, of course, is much smaller, and the ability for Irish infrastructure to handle any great inflow of financial services and practitioners is questionable, as the Irish Finance Minister told us during his visit to the Corporation two weeks ago.

Jeremy also visited Lithuania on 5-6 October, opening and speaking at a FinTech launch in Vilnius in addition to a series of meetings with key officials including the Minister of Finance, Advisors to the Lithuanian Prime Minister and President, and Chair of the Lithuanian Parliament’s Committee of European Affairs. A full note from these engagements is attached. He is currently visiting policymakers in Portugal and heads to Denmark on 27 October.

Oliver Wyman research
The global management consultancy Oliver Wyman has published a report, commissioned by TheCityUK, on the potential impact of Brexit on UK-based financial services. This important study provides a substantive assessment of the likely impact of Brexit.  Following is a summary of key findings.

  • The UK-based financial services sector is a significant contributor to the UK economy. The sector annually earns approximately £190-205BN in revenues, contributes £120-125BN in Gross Value Added (GVA)2, and, together with the 1.1 million people working in financial services up and down the country, generates an estimated £60-67BN of taxes each year. It contributes a trade surplus of approximately £58BN to the UK’s balance of payments.
  • The UK-based financial services sector, together with the related professional services sector, has developed over many years into an interdependent and interconnected ecosystem comprising a large variety of firms providing world-class services, products and advice. This ecosystem brings significant benefits to financial institutions and to the corporations and households they serve. Because of the interconnectedness of the activities and firms within this ecosystem, the effects of the UK’s exit from the EU could be felt more widely than simply in business transacted directly with EU clients.
  • Our analysis suggests that, at one end of the spectrum, an exit from the EU that puts the UK outside the European Economic Area (EEA), but otherwise delivers passporting and equivalence and allows access to the Single Market on terms similar to those that UK-based firms currently have, will cause some disruption to the current delivery model, but only a modest reduction in UK-based activity. We estimate that revenues from EU-related activity would decline by ~£2BN (~2% of total international and wholesale business), that 3-4,000 jobs could be at risk, and that tax revenues would fall by less than £0.5BN per annum.
  • At the other end of the spectrum, in a scenario that sees the UK move to a third country status with the EU without any regulatory equivalence, the impact could be more significant. Severe restrictions could be placed on the EU-related business that can be transacted by UK-based firms. In this lowest access scenario, where the UK’s relationship with the EU rests largely on World Trade Organisation (WTO) obligations, 40-50% of EU-related activity (approximately £18-20BN in revenue) and up to an estimated 31-35,000 jobs could be at risk, along with approximately £3-5BN of tax revenues per annum.
  • In this scenario, the impact on the sector would be greater than the loss of direct EU-related business. For example, the knock-on impact on the ecosystem could result in the loss from the UK of activities that operate alongside those parts of the business that leave, the shifting of entire business units, or the closure of lines of business due to increased costs. An estimated further £14-18BN of revenue, 34-40,000 jobs and ~£5BN in tax revenue per annum might be at risk.
  • This is not a “zero sum game” within the EU. Organisations will not shift activities and employment on a one-for-one basis out of the UK to the EU. For some institutions, the cost of relocation and the ongoing inefficiencies associated with a more fragmented environment could cause them to close or scale back parts of their business. Others, particularly those with parents located outside of the EU, could move businesses back to their home country, reducing their overall footprint in Europe.
  • There are likely to be opportunities arising from new networks of trade and investment agreements, that the UK will negotiate with its partners, and nurturing of growth areas in the sector (for example, FinTech), boosting jobs, taxes and the trade surplus delivered by the sector. Recent work by TheCityUK highlights a number of medium to long term opportunities for the UK, including the creation of Sharia-compliant central bank liquidity facilities, coordinated support for emerging markets wealth management, supporting masala bond trading and issuance, green finance and FinTech.
  • A number of assumptions underpin the analysis outlined above, including the continuation of international norms in areas such as portfolio delegation, UK equivalence agreements with non-EU regulators, continuation of agreements over issues such as data, Know Your Customer (KYC) and Anti-Money Laundering (AML) and continued access to skilled talent from the EU, and non-EU nations. If these assumptions do not hold, then the impact on the sector could be yet larger, particularly over the medium to long term (the next five years and beyond).
  • While it is impossible at this stage to predict what the UK’s new relationship with the EU will be, the final outcome is likely to fall somewhere between these two ends of the spectrum.
  • Settling the new general legal relationship between the UK and the EU and formulating more specific financial services regulations are complex tasks and will take time. Failure to build sufficient transition arrangements, at both the end point of the negotiation of Article 50 and the implementation date of the new regulatory framework, could result in threats to growth, competiveness and financial stability as financial services firms need to change their operating models in order to continue to do business in a compliant way. Certainty on the transitional period is therefore needed as soon as possible.
  • EU businesses have an interest in retaining access to the UK as an international financial centre, not only for the services provided directly but also as a conduit for global investment into the EU. The best outcome would recognise these dynamics and deliver mutually beneficial results for the UK, the EU and the rest of the world.

You can see the report here:

As the Corporation has been pointing out since the vote, EU businesses have an interest in retaining access to the UK as an international financial centre, not only for the services provided directly but also as a conduit for global investment into the EU.

Conservative Party conference
The City Corporation was well represented at this year’s Conservative Party conference as it was at the Labour, Liberal Democrats and this week, the SNP party conference in Glasgow. The main Brexit-related points to come from Birmingham were:

Article 50
Theresa May announced in her speech to conference that there will be “no unnecessary delays” in invoking Article 50 – “We will invoke it when we are ready.  And we will be ready soon.  We will invoke Article 50 no later than the end of March next year.” She added that the decision to trigger Article 50 “…is not up to the House of Commons to invoke Article 50, and it is not up to the House of Lords.  It is up to the government to trigger Article 50 and the government alone.”

New Home Secretary Amber Rudd set out plans intention to tighten controls on immigration, including suggestions of tightening the criteria by which companies can recruit from abroad and publishing data on businesses which employ a high proportion of foreign workers. Defence Secretary Michael Fallon subsequently claimed the plans would not require companies to publish details.


Ireland – Special Representative’s Report
Lithuania – Special Representative’s Report
Oliver Wyman report
Mark Hoban – Speech to COLC European reception