Brexit and the City of London: what changes and when

Britain, which left the European Union in January, loses full access to the bloc under transition arrangements that end at 2300 GMT on Dec. 31.

The 27-nation EU is Britain’s biggest financial services customer, worth about 30 billion pounds ($40 billion) a year. The relationship helped cement London’s position as one of the world’s biggest financial centres and as a major contributor to British tax revenues.

The following details how the City of London’s ability to access the EU market and serve clients in the bloc will change.

WHAT WILL THE EU TRADE DEAL MEAN FOR THE CITY?
Financial services were not part of talks on a EU-UK trade deal and are being dealt with separately by Brussels. But the deal agreed on Dec 24 could make the EU amenable to granting more financial market access to Britain in areas like derivatives trading, even if only on a temporary basis.

WHAT CHANGES IN JANUARY?
From the start of 2021, blanket access for British financial firms to the EU ends and will be replaced by an EU system known as equivalence.

WHAT IS EQUIVALENCE?
This refers to an EU system that grants market access to foreign banks, insurers and other financial firms if their home rules are deemed by Brussels to be “equivalent”, or as robust as regulations in the bloc.

It is a patchy form of access that excludes financial activities like retail banking. British banks have already warned customers in the bloc their accounts will be closed.

It is a far cry from continued “passporting”, or full access, that banks lobbied for in the aftermath of the 2016 British referendum vote to leave the EU.

Access under the system of equivalence can be withdrawn at one month’s notice, making it unpredictable.

HAS EQUIVALENCE BEEN GRANTED?
With less than four weeks to go, Brussels has only granted equivalence so far for two activities: derivatives clearing houses in Britain from January for 18 months, and settling Irish securities transactions for six months.

Faced with limited or no direct access, financial firms in London have already moved 7,500 jobs and over a trillion pounds in assets to new EU hubs to avoid disruption to EU clients.

Trading stocks, bonds and derivatives will be split into less efficient British and EU “pools” if there is no equivalence by January. Britain and the EU have agreed that asset managers in London can continue to pick stocks for funds in the EU.

Most firms anticipate euro-denominated share trading will have to leave London on Jan. 4. But there is a major lobbying effort to allow euro-denominated derivatives trading to stay in Britain a while longer and a chance that equivalence could still be granted in this area before the end of 2020.

WILL EU FINANCIAL FIRMS HAVE TO LEAVE LONDON?
To help maintain London as a global financial centre Britain is allowing EU firms to stay for up to three years, in the hope they will apply for permanent UK authorisation. Britain is also unilaterally allowing financial firms in the EU to offer selected services like credit ratings directly to British customers.

Britain will allow UK investors to use share trading platforms in the bloc.

WHAT’S ALL THIS TALK ABOUT DIVERGENCE?
Brussels says it has not decided to offer equivalence more broadly yet because it wants reassurances that British rules will stay similar to those in the bloc, to avoid Britain potentially having a competitive edge over the EU, and cut EU reliance on the City for core services.

Britain has said it won’t apply some EU rules it inherits, will tweak others like insurance capital norms, and will introduce its own version of pending European regulation for investment firms.

It has also begun a root-and-branch review of regulation and wants to make listing rules more friendly to attract tech firms from across the world.

Britain insists it won’t lower standards and will stick to rules agreed at the global level.

WILL BREXIT END LONDON’S REIGN AS EUROPE’S TOP FINANCIAL
CENTRE?
For now, no. London still has a towering lead over rivals Frankfurt, Milan and Paris when it comes to trading stocks, currencies and derivatives and playing host to asset managers.

Financial firms say shifting more capital out of London than is necessary under Brexit would cause unnecessary and costly market fragmentation.

But in the longer term, if the EU takes a tough line on equivalence and its financial centres reach a critical mass in trading key asset classes, the attractions of London as a financial hub would diminish.

($1 = 0.7523 pounds)