Brexit Broadcast – UK Government’s White Paper

Simon Lovegrove: Hello everyone and welcome to this latest financial services Brexit video.

Today we are just going to briefly run through the Government's White Paper on the future EU-UK relationship.

Jonathan, lots to talk about, but for you what are the headlines?

Jonathan Herbst: I think the headlines are that it's a form of equivalence, which is going to be much enhanced.

So they really want to have equivalence and we may move away from that word. Let's call it partnership.

Not on identical terms but covering all the area covered by the regulations and directives but also anything else very broadly speaking, in the wholesale market. So that's point one.

Point two is the concept of managed diversions is in there i.e. the UK could in principle diverge from the European Framework, however, if it did that, it would agree to consult with the European Union, institutions. It would agree a baseline of international standards and effectively it would not do so without that full consultation.

Now in return for that, what the UK gets is certainty in relation to the equivalence process.

Now as you know, one of the great criticisms of equivalence has been that it is unpredictable and it could be withdrawn. So in return for that, under a treaty, you would have certainty as to the terms on which it is withdrawn.

So, effectively, what you have is an open market within those areas between the two sides. You have an agreed framework of regulation which, I think, in reality, is likely to be largely the European regulation but a form of substantive equivalence assessment on both sides.

There will be mutuality, crucially in terms of access to the UK market as well, or at least that is the gist of it. And you would have that within a treaty, with presumably appropriate arbitration mechanics. And that, in a nutshell is the point.

Simon Lovegrove: And passporting is out?

Jonathan Herbst: Ah – that is very interesting. What the Paper says a number of times is that the UK won't be in the single market. It won't be passported etc etc.

I think we are getting into the realms of political commentary as well but I think that it is fair say that if you had this full extent of mutual recognition. That is a dirty word in a sense now. Mutual access let's call it. Then, question mark, how different it really is to the quotes, 'Passport' but definitely as a legal mechanism, there will no longer be a passport. It will be built on a form of partnership / co-partnership equivalence concept.

Simon Lovegrove: And for firms reading the White Paper, what should they be doing?

Jonathan Herbst: Well, I think that the simple answer is that you have to carry on with your planning. I mean that you have to plan for the worse. That’s just a fact of life in the Brexit debate because as we've seen, even since it was published, there is so much political to-ing and fro-ing and uncertainty.

So, as far as practical issues are concerned a firm, whether it is a bank or an investment firm, needs to carry on with its planning.

I think perhaps where the White Paper influences things is that it's the first time that we have really seen a coherent story from the British Government. Let's see what we get from the other side.

Simon Lovegrove: Jonathan, you've been doing a lot of Brexit work. What else have you been seeing in the market?

Jonathan Herbst: I think that the big question for people, is which of two very simple routes do they take?

Do they take the most conservative route, which is effectively all EU servicing and indeed the back office of that is done from the EU and UK from UK.

Or do they take, what I call is the much more complicated route, of trying to retain their 'follow the sun global model' which most large and medium sized institutions follow.

I think the one thing that I would say is, that it is absolutely clear to us that almost everybody is trying to retain the latter and I think that that is driven largely by cost and the fact that it's an efficient model that has worked for many decades. Not just between the UK and rest of the EU, but also globally. I think that then dictates the kind of analysis that people are doing which is very thorough and looking at all of the cross border analysis on the various regulatory regimes that goes with that. That is the big message that we are seeing.

Simon Lovegrove: That's interesting Jonathan. I know that you've been over to New York recently. What are you seeing in the global market?

Jonathan Herbst: Well, I think that it is pretty simple. Which is that the global financial centres are pretty much staying as they are. What I mean by global is, for these purposes, non-EU business.

The non-EU business in most traded products, institutionally, is being done from New York, London, possibly Singapore and a much smaller amount from EU centres.

I do not see that changing. Let's see how things develop. It could change.

And therefore, the Brexit projects that we are working on are very much looking at the EU interface, as opposed to 'shall we move everything from London or New York'? And let's face it, London and New York are the same for these purposes.

I think that that is very significant and rather different to what we expected two years ago.

Simon Lovegrove: And to finish with Jonathan, we were talking off camera about the overseas persons exclusion?

Jonathan Herbst: Well, look, it's difficult to know exactly what the Government's going to do on that.

I mean the one thing I would say is that there has not been a public statement from the Treasury on that.

As everybody knows, historically the UK has been very wedded to a very open borders kind of approach, for institutional business at least.

You can sit anywhere in the world, pretty much, and do business into London with virtually no regulation.

Now, whether that is a good or bad policy thing, is not for me to comment on.

The one thing I would say is, people need to build into their planning the possibility that one way or another, the UK may adopt the same approach as much almost all, in fact all of the other developed regulator regimes adopt, which is some form of mutual recognition based on some minimal standards of regulation the other way. And I think people just need to be reflecting on that as they build their Brexit plans, if much of their market remains here.

Simon Lovegrove: Thanks Jonathan. That is interesting and we wait to see what the Commission's response is to the White Paper and I am sure that we will cover this further when we hold our Brexit seminar on 5th September.

That concludes this video.

Goodbye.