Hardline Brexit stance threatens City market access, UK warned

Britain’s determination to break away from EU rules is jeopardising the City of London’s future access to the European market, Luxembourg’s finance minister has warned. 

Pierre Gramegna, who has been a strong advocate of preserving the bloc’s links with Britain’s financial services sector, said in an interview with the FT that UK hopes of securing stable access rights were “in contradiction” with the government’s call for unfettered sovereignty in its rule-making. 

The warning is a sign of how the UK’s negotiating position is forcing even sympathetic governments to moderate their hopes for future relations. Luxembourg has been in the vanguard of those calling for the EU to take a pragmatic approach to market access for financial services — a stance driven by the close ties between London and Luxembourg City.

Luxembourg is a global centre for investment funds, private banking and insurance, while London offers exhaustive possibilities for financial firms to seek clients and buy instruments to hedge risks.

Luxembourg’s finance minister Pierre Gramegna wants to preserve the bloc’s links with Britain’s financial services sector © Geert Vanden Wijngaert/Bloomberg

Mr Gramegna said that even if EU-UK relations become more distant in the wake of Brexit, his aim was “to make sure that we still have a footbridge left”. “I think this would be in the interest of both sides,” he said. “But that can only be achieved if both sides have the will to do so.”

With Britain set to leave the single market at the end of its post-Brexit transition period, the EU and UK have agreed that future market access should be based on a system known as “equivalence”, where each side vets the rigour of the other’s regulation and supervision. 

About 40 equivalence provisions are scattered in different EU financial regulations. They cover everything from credit-ratings agencies to swaps trading platforms and can be withdrawn at short notice. 

During the Brexit talks, Britain has argued for trying to make the system more stable with “appropriate consultation and structured processes” before equivalence is withdrawn by either side. But Michel Barnier, the EU’s chief negotiator, has warned that Britain’s position is an attempt to “co-decide with the Union” in an area where the EU should be autonomous.

Underlining that he was not directly involved in the negotiations, Mr Gramegna said: “The United Kingdom is promoting an enhanced equivalence system which to a certain extent I can understand. On the other hand, I understand also the [European] commission saying we want to keep our independence in what we do.”

But he added that the UK was pursuing objectives that were difficult to reconcile. 

“The UK at the same time says ‘as soon as we will be out we will be 100 per cent sovereign again and be able to choose what we do with our own regulation’,” Mr Gramegna said. “That sounds to me in contradiction with the idea of having an enhanced equivalence. You cannot defend the two things in parallel.”

The UK and EU last month missed a deadline to complete assessments of each other’s regulations and have traded recriminations over who was to blame for the delay.

One of the questions facing Brussels in its future dealings with Britain is how far to push for the relocation of the lucrative business of clearing euro-denominated derivatives, for which London is the global centre. The bloc last year equipped itself with the regulatory power to deny clearing houses vital regulatory permissions unless they moved their activities into the EU.

“I’ve heard the positions of both [sides],” said Mr Gramegna, who is a candidate to become the next president of the eurogroup of euro area finance ministers. “But it’s clear that by exiting, the UK loses an important argument to be hosting this clearing capacity.”

“To me it is obvious that it is less natural to have it in the UK than when the United Kingdom was a member,” he added. 

“What is really important is that the place where it’s being done has the financial stability and clout to do this clearing business . . . You need to be a huge financial centre, very strong to be able to cope with that risk.”