Background Briefing: Philip Hammond's Canary Wharf speech

Overview

Today, the Chancellor, Philip Hammond delivered a speech at HSBC in Canary Wharf on his views for a future UK-EU relationship in the area of financial services.  A link to this speech can be found here, where the Chancellor made the following points:

  1. He believed that financial services could be part of an EU-UK Free Trade agreement
  2. He underlined that such a deal would be outside of the Single Market or “passporting” rights
  3. He focused on the approach of managed divergence for financial rule-making, which has been rejected by the EU as an unviable option.
  4. He proposed a situation of “mutual recognition” where the UK and EU would ensure access to each other’s markets
  5. He rejected outright any solution based on the EU’s “equivalence” regime
  6. He underlined that there would be “consequences to leaving the EU” and that “trade-offs should be expected”  

 

Open Britain’s Assessment

  • Despite the Chancellor calling for a special EU-UK services deal in financial services, this flies in the face of the draft European Council guidelines on the future relationship from earlier today which state that “The European Council recalls that the four freedoms of the Single Market are indivisible and that there can be no “cherry picking” through participation based on a sector-by-sector approach, that would undermine the integrity and proper functioning of the Single Market.”[1]
  • During his speech, the Chancellor in particular noted that trade in financial services would not be on the same terms as today, a further sign of realism – following Theresa May’s admission hereto in her Mansion House speech[2] – that the UK’s trading relationship with the EU post-Brexit will be worse than now, despite previous claims by Government Ministers that the UK would be able to get “the exact same benefits.”
  • It is clear that, following today’s daft European Council guidelines[3] as well as the draft European Parliament resolution[4] on the future UK-EU relationship, thanks to the Government’s red lines, the only kind of deal which is available to the UK would be a Canada-style free trade agreement, which would not allow the kind of access in services which the Chancellor so desires. In the past, both the Prime Minister[5] as well as the Chancellor[6] have said that a free trade deal like the one the EU has with Canada would damage the UK economy.
  • Furthermore, in-line with the draft European Parliament Resolution from earlier today, as well as comments hereto by the European Commission’s lead negotiator, Michel Barnier in February 2018[7], leaving the Single Market, would mean the UK losing financial services passporting rights[8], rendering the Chancellor’s aims of including financial services in any UK-EU FTA as meaningless.
  • The Chancellor should take note of interventions by financial experts such as Mark Boleat, the former Chairman of the City of London Corporation, who has noted that some financial services can only be provided in Europe by institutions based in countries in the Single Market, due to the existing rules.[9] 
  • With the importance of financial services to the UK economy where they are responsible for 11% of UK tax receipts[10] and accountable for £22.7bn of UK services exports to the EU27[11], today’s developments  demonstrate again how important it is to bear in mind the implications which leaving the Single Market will have on the UK economy and that everyone is entitled to keep an open mind about whether Brexit is the right path for the country.

 

Explanation of key financial terms:

  • Passporting: The EU’s financial passporting system, allows for financial organisations, with an authorisation in an EU or EEA member state to trade freely in any other EU or EEA member state.[12] Passporting is something which was ruled out by Philip Hammond today and has also   been ruled out by both the European Parliament as well as Michel Barnier.
  • Equivalence: An equivalence regime would allow for sales of services between the UK and EU27, if they had different financial services rules in place. Such a regime would aim to check whether regulations achieved the same outcome — for instance in monitoring financial risk. However, on equivalence, both the UK and the EU27 would set their own rules for market access and decisions can change, providing less stability for business.[13] Equivalence is something which Philip Hammond ruled out today due to concerns it would mean aligning with EU rules post-Brexit in order to guarantee continual access to EU markets.
  • Mutual recognition: A mutual recognition agreement would see the UK and EU27 agreeing that each others rules were acceptable to each other, meaning that UK regulators would be trusted to judge whether certain rules were in line with EU standards.[14] Mutual recognition is not an offer which is likely to work as it would not be compatible with the harmonisation and standardisation of rules across the Single Market and therefore would amount to an attempt by the UK to enjoy all the benefits of the Single Market without taking on any of the obligations. As Donald Tusk, the President of the European Council, has noted in the past, the “cake and eat it” approach is a non-starter.    

 

[1] https://g8fip1kplyr33r3krz5b97d1-wpengine.netdna-ssl.com/wp-content/uploads/2018/03/PARL-Draft_Resolution_4_0503-1930.pdf

[2] https://www.gov.uk/government/speeches/pm-speech-on-our-future-economic-partnership-with-the-european-union

[3] https://g8fip1kplyr33r3krz5b97d1-wpengine.netdna-ssl.com/wp-content/uploads/2018/03/PARL-Draft_Resolution_4_0503-1930.pdf

[4] Ibid

[5] https://www.gov.uk/government/speeches/pms-florence-speech-a-new-era-of-cooperation-and-partnership-between-the-uk-and-the-eu

[6] https://www.chathamhouse.org/sites/files/chathamhouse/events/special/2016-03-02-Philip-Hammond_0.pdf

[7] https://twitter.com/MichelBarnier/status/960579969989660672

[8] https://g8fip1kplyr33r3krz5b97d1-wpengine.netdna-ssl.com/wp-content/uploads/2018/03/PARL-Draft_Resolution_4_0503-1930.pdf

[9] https://www.open-britain.co.uk/boleat_ey_research_shows_brexit_will_damage_our_economy  (11 December 2017)

[10] https://www.cityoflondon.gov.uk/business/economic-research-and-information/research-publications/Pages/total-tax-2017.aspx

[11] http://colresearch.typepad.com/colresearch/2016/08/how-important-is-uk-financial-services-trade-to-the-eu.html

[12] https://www.bba.org.uk/wp-content/uploads/2016/12/webversion-BQB-3-1.pdf

[13] https://www.ft.com/content/30760b06-2200-11e8-9a70-08f715791301

[14] Ibid