The easy sell to the EU that preserves the Single Market for the City
The UK is about to seriously embark on its programme towards Brexit. We have been promised that the government will exercise the country’s right under Article 50 of the Lisbon Treaty in March 2017, which commences a two-year period of withdrawal negotiations.
Those two years will be marked by considerable political activity and, though this will be much less public, a more technocratic type of activity, which will try to determine how the laws of the UK must change to give effect to Brexit.
The point is that Brexit isn’t a political thing at all – unless you are a politician, that is. It is fundamentally about law: what stays the same and what changes. Why so? Because the EU is an entity that is governed by a welter of legislation, all designed to create and operate a thing called the Single Market.
The Single Market is a complex set of mutual trading relationships, where 28 EU member states and a handful of other countries, such as Norway, have agreed to facilitate free trade between themselves on a number of levels, all subject to a system of rules and regulations to achieve fairness. Much to the chagrin of the pro-Brexit camp in the UK, this involves freedom for EU citizens to come and live and work in the UK (while a significant number of UK nationals now have equivalent homes and opportunities in the rest of the EU).
This piece concerns the segment of the Single Market that applies to financial services. My view is that we need to preserve our access to this component of the Single Market (even if we lose touch with other aspects), because financial services remain an utterly vital part of the UK’s economy. It’s about the only major industry where the UK undeniably leads the world, and we will be fools indeed to undermine this in the interests of Brexit politics.
The irony is that the Single Market in financial services is exceptionally easy to preserve. The system we have at present allows all manner of banks and investment firms to secure a licence from a single regulator, and to use this to create rights to provide their services with minimal further regulation in other member states. But it has got out of control.
Under the Maastricht Treaty, the initial steps towards the Single Market promised a system that would enshrine the principle of subsidiarity. Simply put, this provided for central EU-directed rules where needed to enable a functioning market, coupled with the right for member states to continue to make their own rules where centralising was not called for.
The trouble is that this never really happened. What we have had to endure for 20 years is invasive centralisation that has reached far beyond what was needed or expected. Single Market rules therefore apply to small firms of local investment advisers that have no interest in commercial access to other Member States, often in broadly the same way that they apply to major banks and brokers.
The opportunity for a practical reform as part of the Brexit process needs to be taken not just by the UK, but by the other member states as well. The framework for this is actually partly in place already. Pan-EU quasi-regulators such as ESMA (securities and markets, based in Paris) and EBA (banks, currently based in London) are still only talking shops. But they could be rapidly enabled to regulate all cross-border business, leaving local regulators like the Financial Conduct Authority (FCA) to frame proportionate rules for their domestic markets. That would be subsidiarity at work, at long last.
What’s more, the resulting system finances itself, because ESMA or EBA affiliation would be funded via levies on the banks and brokers concerned, not the UK taxpayer. The FCA would collect those fees (just as it does now) and either pass them on or spend them paying for ESMA and EBA administration desks.
Last but not least, this should be a very easy sell to the EU. The European Commission in Brussels will at last be able to propose enabling regulations to fully empower its protégé regulators. And governments in other member states, under local pressure from their own voters to roll back the pervasive influence of the EU, will be able to show that they had actually done something positive to achieve this.
May I implore politicians to take this proposal seriously and place it at the heart of their Brexit negotiation strategy. It’s a winning formula for Europe and Europeans of all persuasions. It is easy to frame, relatively cheap, and simple to achieve without anyone losing face.