Remember when financial regulation was just...not that interesting? These days, it looks more like the 21st-century trade equivalent of a military provocation.
While the main agitator over the past two decades has been the US, with its penchant for high barriers to entry and keenness to police markets beyond its borders, the UK's departure from the European Union is shifting the action somewhat. The EU wants to regulate British firms' access to its single market like those from any other non-member — by ensuring they meet its own high regulatory standards first. The UK, meanwhile, wants the opposite: To be treated like Europe's No. 1 financial center and to be granted privileged access free from the stringent and legalistic purview of Brussels.
The spat is so dispiriting and counter-productive that the City of London might rather wish it would all just go away. While the resignation on Thursday of Sajid Javid as chancellor of the exchequer might normally offer a chance at calming the hostilities, there's little sign of that right now. Politicians seem to be forgetting that financial capital is mobile. It has a tendency to seek out the quick certainty of profit, rather than persevere through any prolonged uncertainty over the rules.
The UK position, spearheaded by the Treasury and the Bank of England, is baffling to say the least. The reported negotiating position that the UK should be granted "permanent" access to the bloc's financial services market as part of the EU's regulatory equivalence regime is obviously never going to fly. Even the US under Donald Trump has never asked for that. Brussels's Brexit negotiator Michel Barnier quickly squashed the suggestion
The request for special treatment comes, of course, with an explicit demand that Britain must never be the "rule-taker" of Brussels, and therefore must reserve the right to regulate its financial firms how it likes. This is also baffling, considering the UK also says it has no intention of slashing the red tape just yet. London wants to have its cake and eat it: Permanent EU market access and full regulatory deference from Brussels.
The take-it-or-leave-it implication is that the UK is the stronger partner, and would happily walk away without a deal. That is probably not what most City firms want. The CEO of Hermes Investment Management, Saker Nusseibeh, said last month that being a rule-taker wasn't so bad if it meant sharing high standards across multiple jurisdictions. "When I get onto an airplane I am very pleased that we are a rule-taker when it comes to aviation safety standards," he told the BBC. He added that it was "common sense" to believe that doing business with different markets meant playing by their rules, too. Still, with barely 11 months to go before the UK has said it wants EU trade talks wrapped up, Hermes wasn't going to wait for common sense to strike: It opened an office in Dublin last year
It isn't alone: More than 330 firms in banking and finance have moved or are moving operations from the UK to the EU, according to New Financial.
Brussels isn't blameless in this squabble either. Where London does have a point is the EU's recent tendency to wield equivalence like a weapon — a case in point was the withdrawal of equivalent market access from Switzerland last year in order to extract concessions on broader trade. There's uncertainty in how the EU regulates market access, too, and the flow of business isn't only one-way: the City of London is Europe's most important financial center and will remain so for the foreseeable future. In recognition of that, more than a thousand financial firms are eyeing offices in the UK after Brexit, according to Bovill. Giving up on the EU's consumer market makes little sense, but neither would giving up on London's deep capital markets.
The more this fight goes on, the more the willingness of businesses to hedge their bets and cover the cost of regulatory uncertainty by setting up operations on both sides of the Brexit divide will break down. German mobile bank N26 this week announced it was giving up on the UK market, a sign that fintech startups might be less willing to wait and see than bigger firms. Simon Gleeson, a partner at Clifford Chance, tells me that big firms studying the transfer of UK-based jobs and assets to the euro-zone have shone a "sharp ray of light" onto their business performance and costs in the two markets, and it doesn't always make for happy viewing.
For their own sake, politicians should quickly aim for compromise. Stuart Weinstein, of Aston Business School, says that both sides might water down their respective positions: More cooperation, better governance and closer dialogue regarding each side's regulatory framework might calm London's fears of line-by-line alignment in all areas, while also convincing Brussels to step back from unilateral equivalence withdrawals. Making financial regulation boring again would be the best outcome — for the bankers, at least.