On 4 January – the first trading day of 2021 – billions of euros of business left the UK for the European Union. Some €5bn of trading in shares ranging from French banks to German car companies departed London and re-appeared in financial centres in mainland Europe such as Paris and Amsterdam.
The shift was a direct consequence of EU financial regulations that stipulate that trading in EU companies (the likes of Volkswagen, Airbus and BNP Paribas) when it is done by EU firms must be transacted within the bloc.
The Christmas Eve Brexit deal agreed between the EU and the UK specifically excluded financial services, yet the two sides did agree to aim for a Memorandum of Understanding (MOU), by March 2021, for establishing a framework for regulatory cooperation in this area.
Broadly speaking, the most the City can aspire to now is “equivalence” for domestic UK financial regulation from the European authorities, which would allow EU firms to continue their usual operations in the UK.
The EU has equivalence deals for some areas of financial services with Switzerland, the US and Japan, so it would seem reasonable for the UK to expect similar. Yet the problem with equivalence is that it is inherently precarious. Under EU law, equivalence can be unilaterally withdrawn by Continental regulators with just 30 days’ notice. This is not a purely hypothetical danger. Brussels deliberately allowed equivalence for Switzerland to lapse last year, preventing EU firms trading on the Swiss stock exchange.
British financial firms warn this threat is like a “sword of Damocles” permanently hanging over them, which will deter investment and hiring in the UK