MNI EXCLUSIVE: EU Access For City Of London May Not Last

By David Thomas

     BRUSSELS(MNI) - The European Union is likely to grant most of the UK

financial services industry "equivalent" status at the end of the year for fear

of otherwise endangering market stability and pushing up European companies'

financing costs, but the EU could gradually reduce the City of London's access

to the bloc if its regulations begin to diverge, officials in Brussels told MNI.

     Financial services will be excluded from any EU-UK free trade agreement

following the conclusion of the Brexit transition period on Dec. 31, officials

said. While most expected the European Commission to immediately grant access on

grounds of regulatory equivalence, such status can be withdrawn with 30 days'

notice.

     "The Commission's first priority in deciding whether to grant equivalence

to EU financial services at the end of this year would be an assessment of what

are the effects on the EU(-27) economy," one source said, while another

suggested the Commission could attach conditions to the continuation of

equivalent status.

     "If the EU had concerns about the direction of travel, there again it can

always grant equivalence for a fixed period of time or maybe attach conditions

to it."

     UK financial institutions, until now able to operate within the EU thanks

to "passporting" rights to be lost after Brexit, will have to seek recognition

from EU regulators under an equivalence regime, which would apply to 40-odd

financial sectors, according to officials.

     Retail banks and insurance brokers will not be eligible, and the EU will

closely monitor regulatory compliance, particularly in light of recent comments

by UK Chancellor Sajid Javid and Bank of England Governor Mark Carney, hinting

that Britain may seek to bolster competitiveness by diverging away from EU

standards.

     "At the first sign of divergence - BOOM!" a source said.

     --OUTCOMES-BASED EQUIVALENCE

     While, in the case of financial services, Javid indicated that divergence

might be limited, with the government favouring "outcomes-based equivalence,"

another EU source responded warily.

     "No credible reply can be given to such general statements. The EU will

make a separate assessment for each area where relevant legislation allows for

third country equivalence and then take decisions based on those assessments,"

the source said.

     Clearing is of particular concern to both the UK and the EU, given its size

and systemic significance. Many EU officials would like to see clearing of

euro-denominated financial instruments relocated to the eurozone but accept that

this may significantly increase corporate funding costs.

     The EU will have the option of directly supervising London-based clearing

houses or even ordering the relocation of some euro clearing business, officials

said.

     One Brussels insider prepared to go on the record said the EU is ready to

take a tough line.

     "Long-lasting equivalence will not easily find its way into any EU/UK trade

deal," said Jacques Lafitte, CEO of consultancy Avisa Partners, "The EU sees

equivalence as the carrot for regulatory alignment. The odds are that divergence

will be almost automatically sanctioned by an equivalence withdrawal, and the

decision process for that is now damn short."

     "The EU has spent the last three decades being nice to the City and got

Brexit in return," said Lafitte, who served as adviser for launching the euro

under Commissioner Yves Thibault de Silguy between 1995 and 1999.

     But one EU official from a northern country felt financial services could

give the UK leverage in trade talks because of the threat of rising funding

costs for EU-27 companies if access to London's markets were lost.

     "The EU doesn't have anything like the City yet. We should have and Capital

Markets Union is aiming to get us there, but we're not there yet."

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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