UK's biggest tax earner at crossroads

Britain’s financial services industry, the country’s biggest tax earner, risks being cut adrift from its main export market — the EU — after Brexit.

Banks, insurers, and asset managers in Britain currently have free rein in seeking customers, investors, and markets across the EU, helping to maintain London’s standing as a top global financial centre.

But with Brexit potentially only two weeks away, it is not clear exactly how much EU access Britain’s financial sector will be able to retain.

Britain has already extended its Brexit deadline twice to October 31. Another extension would allow the finance industry in Britain to maintain full access to the EU until a new Brexit date.

Britain’s prime minister Boris Johnson has said he would rather “die in a ditch” than ask for another extension — but parliament has passed a law requiring Britain to request an extension if a deal cannot be approved in the House of Commons.

More than 300 banks, insurers, and asset managers in Britain have already opened new EU hubs to ensure continuity of service with European customers whatever form Brexit takes.

The two Brexit extensions have slowed down the relocation of jobs and activities, such as share trading, from London to new bases in the EU, despite pressure from EU regulators for Britain’s financial firms to put more boots on the ground.

Another lengthy extension would be likely to put the brakes on the shifting of more business from London to EU centres such as Paris, Frankfurt, Amsterdam, and Dublin.

A divorce settlement between Britain and the EU would mean business-as-usual for the financial sector during a fixed transition period.

An earlier draft withdrawal agreement included a transition phase until the end of 2020 to allow time for new trading arrangements between Britain and the EU to be slotted into place.

After this transition period, the EU has said that market access for Britain’s financial sector would be based on the EU’s “equivalence” regime.

Under this system, Brussels grants direct access to EU markets if it deems that Britain’s financial rules are aligned closely enough with those in the EU.

The process, which is also used by financial firms in Japan, Singapore, and the US, can be long and complex.

But equivalence offers only patchy and unpredictable direct access, which is why so many UK-based firms have set up in the EU.

Equivalence would also require Britain to stay aligned to EU rules when UK financial regulators do not want their hands tied.

Reuters