BAML's clever solution to the Brexit problem
Did Alex Wilmot-Sitwell, EMEA president of BAML, just solve the intractable problem of the City's situation outside the European Union? Probably not, but he certainly set a realistic goal to aspire to.
With Britain's Brexit negotiations lost in the fog of political obfuscation, the House of Lords EU Financial Affairs Subcommittee spent this morning quizzing senior London finance professionals about what they would like to happen when Britain and the EU part company.
Douglas Flint, chairman of HSBC, Wilmot-Sitwell, and Elizabeth Corley, vice chair of Allianz Global Investors, have been busy articulating their opinions to their Lordships.
In the process, Wilmott-Sitwell suggested a negotiating position that could suit the City of London, and the voting population, and the EU.
Wilmott-Sitwell's solution amounts to a sort of 'Equivalence+.' If you've been following the discussions about the City of London's future outside the EU, you'll know that there are essentially three options: 'passporting,' WTO rules, and equivalence.
Passporting is what we have now. It allows London-based finance firms full access to the EU single market. It also allows EU-based finance firms full access to London. Passporting is perfectly suited to the City, but it requires acceptance of unlimited migration to and from the EU, which is not politically palatable.
The WTO rules are what we'll revert to if an agreement can't be reached. They are a huge danger for the City: the WTO rules cover free trade in goods, but not services - let alone the complex area of financial services.
Equivalence is what Norway and Switzerland have (the so-called 'Swiss option'). Equivalence means that you're outside the EU and can impose some agreed restraints on migration, but that you also have full access to EU markets as long as your regulations are deemed equivalent with the EU's. Equivalence should be palatable to the British public. It sounds good, but there's a catch: it's not guaranteed. As Simon Gleeson, regulatory partner at Clifford Chance LLP, told Bloomberg recently: “There’s only one thing about equivalence that really matters and that is that it can be withdrawn at any time."
This is where Wilmot Sitwell's solution comes in. He (and by implication BAML) want equivalence that can only be withdrawn following a period of negotiation. He also wants equivalence that is determined following a joint discussion of the rules being matched.
"Equivalence can work, but it would need to be very different to equivalence in its current form," Wilmott Sitwell told the Lords. "... it needs to go hand-in-hand with a shared regulatory response...a harmonized approach to regulation... it needs to be thought through on a long term basis."
BAML's Brexit plan therefore implies leaving the UK leaving the single market, ditching passporting, imposing restrictions upon migration, and negotiating an 'equivalence regime' with the European Union which allows for UK input into EU banking rules along with assurances that equivalence won't be withdrawn in the short term.
Would that work? Maybe, although it's not clear whether the EU would allow the UK a place at its rule-making table. The UK finance industry's arguing position - repeated today - is that it's in Europe's interest to ensure Brexit leads to a satisfactory outcome. "Customers get huge benefits from consolidating [their financial services transactions] in one place," said Flint. "If you dismantle and fragment things, it becomes less efficient for them....They can either accept the lower efficiencies or go somewhere else - and that will be the U.S."
For Equivalence+ to work, London's finance firms would also need multi-year assurances of regulatory stability. Equivalence would need to be judged and negotiated every 36 months (or more). The key would be the "adjudication on continuing equivalence," said Flint. He noted that it's taken HSBC "three years to move a thousand people to Birmingham" and that moving entire business lines out of London would take longer still: "Could a business model accommodate the risk of someone coming and saying, "I don't think you're equivalent any more and that means you're out of business?"
Equivalence+ is, at least, something for the British government's negotiating team to work towards. In the meantime, the finance dignitaries before the Lords underscored the importance of at least some visibility as to what's going on. "We need two pieces of information," said Flint. "Where is the government trying to get to, and what are the bridge arrangements between leaving and getting to that?"
The senior financiers at the Lords also politely implied that the 'Brexiteers' suggesting the City can forge itself a whole new future outside the EU don't know what they're talking about. "We're the wrong people to ask as we're global firms already," said Corley. "As a global firm, I can say that we look at things on a global basis," Wilmot-Sitwell agreed.
Photo: Michael Blann, Getty images