The UK is not seeking 'passporting', as it will no longer be a member of the single market, but neither should it be treated in the same way as other 'third countries', given the scale and complexity of UK-EU financial services trade", Philip Hammond said, in a speech in the City of London.
Hammond's speech, which follows on from that of prime minister Theresa May late last week, was intended to "address the sceptics who say a trade deal including financial services cannot be done because it has never been done before". In it, he set out the UK's vision for a future system based on continued close supervisory cooperation, with "proper governance structures, dispute resolution mechanisms and sensible notice periods to market participants".
The chancellor was speaking shortly after EU Council president Donald Tusk published the EU's draft position going into the next round of negotiations (6-page / 117KB PDF), which will begin later this month. The draft guidelines do not make explicit reference to financial services, but reiterate that the UK will not be able to "cherry pick" access to the single market on a sector by sector basis.
Financial services expert Tobin Ashby of Pinsent Masons, the law firm behind Out-Law.com, said that Hammond's speech was "what many financial services firms will have been wanting to hear for some time, although it still doesn't provide answers as yet and the EU even launched a pre-emptive rebuttal".
"Given the current alignment of regulatory regimes, the EU's stance that a trade deal with the UK cannot include financial services seems a bit disingenuous, but we now at least have clear negotiating lines drawn," he said.
"For existing cross-border business, however, firms may not be able to wait for the outcome of the political negotiations. It is already getting late in the day for firms to start dealing with how to service that business unless a transition period is agreed, and regulators have been pushing for some time for firms to take action before it is too late," he said.
In his speech, Hammond said that it was in the interests of both the UK and the 27 remaining EU member states to ensure continued access to each other's financial markets. He also suggested that any loss of UK market share post-Brexit would not automatically lead to increased prominence for other European financial hubs.
"The real beneficiaries are more likely to be New York, Singapore and Hong Kong, cutting Europe's market share and leaving Europe as a whole less competitive, and more reliant on distant financial centres, operating under very different rules," he said, citing research by the Oliver Wyman consultancy.
Hammond said that the EU's third country equivalence model was not an appropriate solution for the UK's financial market. The relative size and complexity of the UK's financial market, and the risks that are therefore borne by UK taxpayers, mean that it is not appropriate for the UK to "simply be an automatic 'rule taker'", and to be placed in a position where EU market access can be withdrawn at any time, he said.
"We cannot sign up to automatically accept as-yet-unknown future rule changes," he said. "We must have the ability, if necessary, to deliver an equivalent outcome by different means, maintaining our commitment to ensure access to each other's markets is on fair and non-discriminatory terms while protecting UK taxpayers from potentially unacceptable risks."
"The principle of mutual recognition and reciprocal regulatory equivalence, provided it is objectively assessed, with proper governance structures, dispute resolution mechanisms and sensible notice periods to market participants clearly could provide an effective basis for such a partnership," Hammond said.
"And although we will be separate jurisdictions, we would need to maintain a structured regulatory dialogue to discuss new rules proposed by either side, building on our current unparalleled regulatory relationships to ensure we deliver equivalent regulatory outcomes, agreeing mutually acceptable rule-changes where possible. And where rules do evolve differently, we will need an objective process to determine whether they provide sufficiently equivalent regulatory outcomes," he said.
The UK's market regulators should maintain a "very close working relationship" with their EU equivalents in order to support future regulatory equivalence, Hammond said. This relationship should incorporate "proactive and extensive information exchange" and data-sharing agreements which go "far beyond what is available in ordinary third-country relationships", he said.