London: the European City
The Square Mile is not just about the banks
The City of London has been a global centre for business for hundreds of years, constantly reinventing itself to reflect the needs of the country and the world. This success has been built on the UK’s open and outward-looking nature, welcoming talented individuals from around the world and seeking overseas business opportunities and inward investment. It has meant we have evolved over the years to become the leading financial centre of the world, which serves not only British demands but European needs for financial and professional services.
The City is challenged only by New York, Singapore and Hong Kong. The UK’s financial and professional services sector accounts for around 11 per cent of economic output and generates more than £66bn in tax revenues for the UK. But the City also acts as a gateway for international trade with the rest of Europe: investment flows through the City and then spreads throughout the EU.
Removing the City from the EU would leave a big gap. That is why maintaining easy access to our most important market will be extremely important in maintaining economic growth, not only for the UK but the EU as well. The current system of passporting, under which regulatory permission in one EU state allows companies to operate legally in others, is undoubtedly the best option, although two others have also been debated over the past few months.
In EU law, equivalence is a judgment by the EU authorities that the regulatory system in a third country, covering a particular product or service, is of comparable quality to EU law.
Assessments of equivalence are performed by the European Commission based on technical advice from European regulatory authorities. Equivalence can be withdrawn within 30 days if it is judged the third country’s regulatory regime no longer provides equivalent outcomes. Importantly for the UK, equivalence does not cover a number of banking and insurance products and services.
Additionally, if the UK were to settle on equivalence as a means of doing business within the EU, we would have to comply with all future European regulations but would have no say in how they were drafted. We have by far the largest financial services sector in Europe: being a rule-taker is not a long term solution for the City.
World Trade Organisation
It has also been suggested that in a “hard Brexit,” the UK could rely on the rules of the World Trade Organisation (WTO). The UK is already a WTO member, however its membership terms are grouped with the EU’s and individual member states cannot negotiate their own trade deals.
Establishing the UK’s WTO membership permanently after Brexit would involve both the UK and the EU negotiating simultaneously with the rest of the WTO’s 162 members. This would be a long process, vulnerable to tactical delays by countries that see opportunities to increase their own market access by hard bargaining. It is unclear how the UK’s membership of the WTO would be affected during this negotiation if we had already left the EU.
In joining the WTO independently, the UK would be creating its own rights and commitments out of the EU’s, and it is likely that the UK will be negotiating with the EU, and the WTO’s 162 members as the EU conducts the same negotiations at the same time. Negotiating free trade agreements while the UK’s membership of the WTO is uncertain may prove challenging. To complicate things further, the EU’s current terms with the WTO are a secret.
Financial and professional services employ more than 2.2m people across the country, with more than two thirds of them outside London. These jobs are often high quality, skilled positions providing fruitful opportunities to new generation of Britons in cities from Edinburgh to Bristol, Belfast to Leeds. Many are related to the business Britain does with the European continent and our international partners, so maintaining strong business links with the continent means maintaining these jobs at home and helping support the wider European economy.
There needs to be a thorough debate on the issues that Brexit brings up, with businesses carefully assessing the impact of the alternatives and feeding those assessments into the policymaking process. During the Brexit negotiations, it is important that the government takes into account the role that financial and professional services play, not in order to protect “the City” but to protect jobs, tax revenue and the efficient functioning of the economy.
We need to secure access to the European single market on the best possible terms for one of our country’s most important industries—financial and professional services.
On the 17th of January 2017, Prospect hosted a roundtable discussion with the contributors to: Brexit Britain: the trade challenge. This report is designed to act as a guide for parliamentarians, officials and businesses with a stake in the UK’s changing relationship with the world following Brexit. The discussion was chaired by Tom Clark, Editor of Prospect. Participants included Tasmina Ahmed-Sheikh MP, Miriam González and Vicky Pryce.
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