The next Brexit Deal is the important one.
- Friday, January 29, 2021
The Brexit agreement made late on Christmas Eve was welcomed by financial markets and by British business with sterling and UK equity markets strengthening in response. The Brexit deal agreed covered the trade of goods but not the trade of services. These were left out of the Brexit deal to be agreed separately. As much as 80% of UK’s entire GDP is earned in the service sector and was unaffected by the first Brexit deal.
The UK government granted full access to UK markets for EU firms involved with investment management and exchange and credit agents, back in November, by granting them regulatory recognition or ’equivalence’. The UK was up until Brexit, the EU centre for financial regulation so there has been no divergence in equivalence. However, UK financial services lost their EU passport or equivalence on the 31st December and this has not been renewed. The European Commission has no immediate plans to match the UK actions and grant British based firms European market access through equivalence. Industry leaders are seeing this lack of action as a way of forcing firms to relocate to continental Europe from the City.
The Investment Association has asked the EU to recognise the UK regulatory regime as being equivalent in order to minimise any further disruption in this key market. The EU has asked for the UK’s future intensions over regulations in what is seen as a delaying tactic. The Bank of England Governor, Andrew Bailey has said that the EU request over the UK future intensions on regulation ‘was problematic’ and that he ‘would not accept equivalence at any price’
It is expected that over the coming months both the UK and EU will monitor each other’s regulatory developments to ensure that each regime meets the equivalence test and that UK firms will obtain passporting rights for the provision of financial services to EU markets by the end of March.
One interesting development that has come out of the UK leaving the EU and freedom from the EU financial regulations is that the London Stock Exchange can now allow the trading of Swiss company shares which was previously banned by the EU.
As London and Zurich are two of the most significant financial centres in the world, which if added to the status of both Edinburgh and Geneva, the combined size of the UK-Swiss financial market strength is far greater than the rest of the EU combined. Mutual stock market share trading could be the start of a new mutually beneficial relationship. The Bank of England and the Swiss National Bank could agree on mutual standards of regulation so that any securities sold in London can be sold in Zurich or Geneva. This will remove trade barriers and grow volumes. Both centres could benefit from one another’s knowledge such as Swiss crypto currency expertise and London’s Fin Tech advancements.
This link up has the opportunity of becoming the dominant player in the EU time zone.
Chris DaviesChartered Financial Adviser
Chris is a Chartered Independent Financial Adviser and leads the investment team.