The City is a very important part of the UK economy, and it is theoretically vulnerable in the case of a no deal Brexit. Freshfields Bruckhaus Deringer, the law firm, has published a detailed paper on the likely legal consequences of Brexit on the City. From it, a few things are clear:
First, if the UK is accorded regulatory equivalence with the EU (as is the case for the US, Japan, etc) then this very significantly reduces the size of the problem. The EU will want to continue to access the City’s services and therefore should have a clear incentive to accept regulatory equivalence. They can also hardly argue that it is not equivalent as it is currently part of the EU system.
Second, after a finding of regulatory equivalence, the next most important thing appears to be the extent to which delegation of activities is accepted. By way of example, the management company of a particular fund may need to be located in the EU, but if that company is then free to contract with another company (in the UK) to secure advice on the management of the fund, then nothing much really needs to change. The fund manager can continue to sit in London.
Third, even where regulatory equivalence and delegation do not allow the maintenance of today’s structures, there are often other structures which can be put in place which will minimise the impact of Brexit and minimise the displacement of activity to the EU.
These findings lead me to conclude that seeking a regulatory equivalence finding from the EU Commission on the broadest basis is an urgent priority (they can take their time…) and must be a condition of our divorce payment. We should be prepared to play hard ball here if required. While, in most areas, I would propose unilaterally recognising and maintaining access for EU products and services to our markets (subject to our tariffs, of course), this is one area where I would make it clear to the EU that, if they seek to withhold regulatory equivalence from the City, then we will refuse them access to it. They are not even close to ready to take on the City’s functions, and the hard deadline of March 2019 works in our favour in this instance. If the EU were to refuse regulatory equivalence, they would do themselves untold damage, and their refusal would be a clear example of trade discrimination.
The July 2018 White Paper is based on equivalence. However, I am concerned, given the weak positions adopted by the UK throughout these discussions, that we may fall into a trap here. We need to be clear what we mean by equivalence. It should NOT mean identical rules to the EU. It should mean any rules which are used by any other countries which are granted equivalence by the EU and any rules which achieve a set of mutually accepted outcomes, as determined by the global financial community, and not as determined by the EU.)
The Freshfields findings also reinforce my previously stated view that the critical thing here is to make sure that those who work in the City want to stay in London. That, for me, means suspending changes to non-dom status, ensuring that tax rates are kept low, removing banking levies, looking carefully at taxes on insurance, and so on. There needs to be a dedicated and technically capable team established as soon as possible to develop the “keep it here” plan for the City and there needs to be the political will to take the criticism for easing the fiscal pressure on those unpopular bankers. UK voters are not idiots: they can understand that there are times when you have to accept the lesser of two evils.
One other important move is necessary: we need to ratify the Hague Convention on Choice of Court Agreements, to which the EU is already a signatory. This will allow our courts to maintain their standing internationally in the resolution of disputes in cross-border and international contracts, which will be important for the City and other sectors.
Jamie Arnell is a partner at Charterhouse and is writing in a personal capacity. This article is part of a longer series by Jamie Arnell on the ConservativeHome website. We are grateful to ConservativeHome for permission to publish this extract. The full article (no.2 in the series, published on July 31) is at : https://www.conservativehome.com/platform/2018/07/james-arnell-no-deal-2-trade-and-regulations.html
