City firms expected to forge strong deals after Brexit
Independence from European Union laws and regulation will enable the UK to “make beneficial trade deals with partners around the world”, according to analysis from the Legatum Institute, a think tank whose Special Trade Commission was set up post-referendum to examine the UK's negotiating options.
While senior figures from across the City have raised concerns about the loss of financial passporting once the UK leaves the EU, the report points to the existing “strengths of the UK financial services industry” on the global stage that will enable the UK to increase links to emerging markets with fast-growing savings pools.
The report also highlights the “strong mutual interest in maintaining mutual market access” for EU and UK financial services firms, owing to extensive existing links. For instance, 726 insurance firms in the European Economic Area (EEA) have passporting rights into the UK under the Solvency II regime, compared to 220 UK firms with passports to EU countries.
The report concludes that a free-trade agreement would be the “significantly preferable” outcome in the long term, but recommends an interim framework to minimise disruption and costs to companies. This would entail either using pre-existing equivalence regimes or mutually recognising standards and regulations.
Equivalence regimes rely on the mutual recognition that regulatory standards are equally stringent in different jurisdictions, such as the USA and the EU. Sectors with pre-existing equivalence include investment services, alternative investment funds, and clearing of over-the-counter (OTC) derivatives.
The analysis by the Legatum Institute says that “there is no legal obstacle to equivalence recognition” under regimes such as MiFID, EMIR and the AIFMD, as the UK will have “identical regulation” when it leaves the EU in 2019.
Negotiation will be required in sectors which do not have existing equivalence regimes, including the retail banking and insurance sectors. The authors of the Legatum report are optimistic that agreement in these sectors can be reached as failure to do so would, they say, result in “damaging [the EU’s] own interests”.