Two years ago, one City practitioner memorably told me that the freshly agreed deal between London and Brussels on financial services amounted to a “nothingburger”.
This sad sandwich, the text of which was agreed but never signed, ended up in the deep freeze as relations soured over the Northern Ireland protocol. Now it seems likely to be thawed, reheated and served up again. Enjoy!
It is progress that relations between the UK and EU could be moving from the type of outright hostility that prevents any meaningful dialogue at all to something slightly more constructive. The Windsor framework, which aims to end the bitter dispute over Northern Ireland’s place in the post-Brexit order, could unlock movement on other fronts, including the memorandum of understanding on financial services.
But it’s hard to get too excited. The text agreed two years ago was simply a basis for official discussions, with the aim of exchanging information every six months. This was always a political forum in two ways: UK regulators already have bilateral channels with their counterparts; policymakers in Brussels had been clear that this step was a hurdle to be cleared before discussion on anything else could start, namely the regulatory equivalence decisions that could ease cross border activity in financial services.
The two sides are moving closer to having a “formal talking shop” in the words of one former senior Brussels official, who sees the chances of this translating into near-term changes on access or co-operation as “doubtful, very doubtful”. Equivalence decisions are technical and time-consuming. But, notes Thomas Pritchard at Eversheds Sutherland, “the political aspect is huge”: the thawing of relations unlocks the hope of progress, if not progress itself.
Hope is nice, especially as it comes at a rather dismal time for London. Building materials group CRH wants to ditch the UK market for the US, where it sees the bulk of its future growth. Betting company Flutter is considering similar options; plumber Ferguson has already gone. More listed companies will be picked off by private equity. The number of listed companies has fallen more than 40 per cent in the last 20 years, says think tank New Financial, and the UK’s share of global initial public offerings has dropped from 13 per cent to less than 4.
This doesn’t have much to do with Brexit. A persistent UK equity market discount, which opened up after 2016 and peaked in 2019 at the height of Brexit chaos according to investment bank Panmure Gordon, probably hasn’t helped against loftier valuations stateside. But the dwindling allocation of UK pensions money and other long-term capital to UK equities (or indeed the UK at all) predated the European schism and is widely seen as fundamental to London’s difficulties. The shifting of some trading businesses and assets into continental Europe has little to do with the increasingly obvious withering of the UK stock market.
Pinning too much significance on a refreshed relationship with Brussels may actually be unhelpful. For a start the finance industry, restructured and reshaped to access where it needs to, has moved on. It never really saw equivalence as an attractive basis for business in the first place. It’s also notable how little even of the government’s prescription for the future thriving of the City is concerned with Europe at all: only half the Edinburgh reforms have anything to do with the continent, notes New Financial.
This is good news. It means that the blueprint for financial regulatory reform isn’t the kind of dismembering likely to provoke horror across the Channel. But also striking is how little of the proposals were at an advanced stage: indeed about half the measures involved a new consultation or similar. The more fundamental reforms, particularly around capital markets and pensions, are largely domestic in nature and yet to get going in earnest.
It can’t hurt if relations between the UK and Brussels come in from the cold. But when it comes to London the priority should be to light a fire under its own reform efforts.