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Brexit plans


UK financial sector targets Swiss-style deal to access EU market


By Martin Arnold and Caroline Binham


The City of London's financial sector is planning how to re-position itself with the EU (Keystone)

The City of London's financial sector is planning how to re-position itself with the EU

(Keystone)

The City of London has given up hope of universal access to the EU single market and is now seeking a bespoke deal for its different sectors to trade with Europe, with similar but stronger ties than Switzerland.

Teams across the City and Whitehall have been working over the summer to draw up a plan for Britain's exit from the EU.

Officials and representatives from the financial sector are getting ready to present their policy ideas in time for them to be considered by the cabinet committee for Brexit, chaired by Theresa May, the prime minister, when it meets in early September, people involved in the preparations told the Financial Times.

he City has come to the conclusion that a deal for the UK to emulate Norway's relationship with the EU is very difficult both politically and practically. Norway has access to the single market but no say in how regulations are set. It must both accept free movement of people and make budgetary contributions.

Instead, there is a preference for a unique trade deal, building on Switzerland's arrangement.

Swiss "plus"

A task force of grandees, chaired by Shriti Vadera, the chairman of Santander UK and a former Labour minister, is close to embracing this judgment. The group has already been provided one blueprint, a 110-page document prepared by the British Bankers' Association, advised by Clifford Chance and Global Counsel, the advisory outfit founded by Lord Mandelson, the Labour peer.

"There needs to be a bilateral deal providing as full two-way market access as possible," said Anthony Browne, chief executive of the BBA, who has been part of Ms Vadera's task force. "Both sides have an interest in making this work, as it is not in the interests of the other EU countries to be cut off from their main financial centre, especially at a time they are all seeking to boost economic growth."

Mr Browne cited Switzerland's trade deals with the EU that give some sectors, such as life insurance, full two-way access to the single market via a so-called passporting deal in return for keeping its regulation at an equivalent level to that in the bloc.

Swiss banks do not benefit from any such trade deal, meaning they must do most of their EU capital markets business from their London subsidiaries.

But the City, which was overwhelmingly in favour of remaining in the bloc before the June 23 referendum, will argue that because the UK is the biggest export market for the rest of the EU it should be able to negotiate a beefed-up version of Switzerland's arrangement.

Many financiers are reluctant for their ideas to be branded as "Swiss plus", not least because Swiss politicians are frantically seeking ways to preserve their EU trade deals as they become increasingly contentious in Brussels.

"Special status"

Xavier Rolet, chief executive of the London Stock Exchange and a member of Ms Vadera's task force, said: "European companies large and small as well as governments rely heavily on access to the UK financial services sector and the work of this committee is to look at the impact of the sector on the real economy."

He added: "I do think that in a world where financial and business flows are deeply global and interconnected it is critical for passporting to be maintained and that requires some element of regulatory equivalency."

Elizabeth Corley, the vice-chair of Allianz Investors and a member of Ms Vadera's task force, told the FT: "What we want to do is make sure the way we move forward is joined up. We need to make sure that we leave the capital markets strong: this is vital both for consumers and businesses."

The government's official negotiating position will not be revealed until the end of the year but Mrs May wants informal positions to be ready in the early autumn in order to take "soft soundings" off Scotland, Wales and Northern Ireland but also from key decision makers in Brussels, said people involved in the process.

Earlier this week, Michael Roth, Germany's European Affairs minister, said that the UK could gain "special status" with the EU and have a bespoke deal. He repeated warnings, however, that the UK would not be able to "cherry pick" its position.

A likely obstacle to achieving the type of bespoke trade treaty that many in the City are pushing for could be an EU demand that the UK accepts freedom of movement of people from the bloc as a condition of keeping any single market access.

Given how passionately many Brexit supporters want to control immigration, they are unlikely to accept the type of arrangement that Switzerland and Norway have in effect accepted by joining the Schengen passport-free travel area.

Adjustment period

The biggest fear for many City grandees is that financial services could face a "cliff-edge" moment if the UK leaves the EU without a trade agreement in place, cutting off access to the single market overnight. This has prompted some to call for a transition agreement to allow more time for groups to adjust.

There are fears that even if an acceptable deal is struck between the UK and Brussels, it could be scuppered if one of the 27 member states rejects it, as happened in April when the Netherlands voted in a referendum to rebuff a planned EU free-trade accord with Ukraine.

Chris Cummings, chief executive of TheCityUK lobby group, said: "Business likes certainty and predictability and part of the deal will be ensuring a transition agreement so that supply is not interrupted - nobody likes power cuts."

Financiers argue that it takes banks at least two years to move chunks of their business across borders - citing the time Bank of America took to move its vast derivatives book from Dublin to London. So they want early certainty that they will not face a moment in which their access to the EU market evaporates overnight.

They said that even if there were no gap between a new trade deal being agreed and implemented, big financial institutions will still need an adjustment period to update their IT systems and operational structures in line with the new arrangement.

Task force

Both the BBA and Ms Vadera's task force - known as the European Financial Services Chairman's Advisory Committee - have spent hours examining what access the City would have to the single market without a bilateral trade deal to replace EU membership.

They have found that many areas of the industry - such as cross-border lending and corporate deposit-taking - would be left without access to EU customers. Their work mirrors a parallel assessment being made by the Treasury.

There are some signs of tension between the BBA, Ms Vadera's committee and TheCityUK, with each jostling for position as the main interlocutor with government. City grandees are also concerned that their views may struggle to be heard by both David Davis, the new secretary of state for exiting the EU, and Michel Barnier, the lead Brexit negotiator for the European Commission. Neither man is thought of as a fan of bankers and finance.

The BBA aims to publish several position papers on what Brexit means for banks, but Ms Vadera's committee is unlikely to publish any official document, as it views itself more as a sounding board. Meanwhile consultants at Oliver Wyman are working with TheCityUK to examine the consequences for jobs and activity in the sector of various Brexit scenarios.

A Treasury spokesperson said: "We are actively engaged with the financial services sector and welcome its input as we prepare for the negotiations to exit the EU. Our position is absolutely clear, Britain remains open for business and we will work hard to get the best deal possible deal."

Copyright The Financial Times Limited 2016

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