Last week the Financial Times reported that a promised government position paper on financial services was possibly going to be dropped, casting doubt on what the UK’s position is on the future of financial services after Brexit.
Whether or not the report ever surfaces, banks themselves have been given virtually no guidance or communication over what the UK government wants to achieve.
“I think we are in a complete holding pattern here,” said the head of government affairs at a top international bank. “The disappointment and incredulity in Brussels because the UK has not come forward with anything is also very strong.
"The cabinet cannot come to a decision and these speeches are driving everyone mad. Never mind actually agreeing a cabinet policy together, speeches not only have to be cleared with Number 10, but a policy paper has to be cleared with every other department which is why they can’t write anything.
“This financial services paper is an example, and who knows if it exists or not, but they have clearly got to a point where they can’t agree anything.”
With the UK position unlikely to get clearer, and time running out for negotiations, some EU politicians, including Dutch MEP Paul Tang, have called for the City and financial services to move ahead separately, and show a willingness to pay privately for the benefits of access to the European Union.
Industry blueprint
For now, few in the industry have advocated such a move — but financial industry groups have been working overtime on figuring out how future relationships between the UK and EU could be structured to minimise disruption to the financial sector.
Financial industry groups UK Finance and City UK have put forward a blueprint for an arrangement of mutual recognition between the City and the EU along with a free trade agreement which would allow for operations to continue as unimpeded as possible after the UK's official exit from the Union in 2019.
The report, titled Supporting Europe’s Economies and Citizens: a modern approach to financial services in an EU-UK Trade Agreement is claimed by UK Finance to offer an ambitious trade framework to enable trade in banking and capital markets services across the EU and UK following Brexit.
This idea has been endorsed publicly by a number of major banks, including JP Morgan. But despite the UK Treasury pledging last year to digest the details of the paper, City firms have not heard from the government whether it backs such an approach or not.
Black hole
“The industry has put forward various papers on mutual recognition in a free trade agreement which were put out through UK Finance and City UK, and we are advocating strongly for that,” said the head of government affairs. “But we don’t even know if the government wants to go down that route, never mind persuading the EU 27."
He continued: "So we have been running around Europe, and our firm has a plan to meet every country in the bloc over the next few months, to discuss this paper, which is an industry idea and not a government idea. But honestly, if the government doesn’t accept it and incorporate it as part of its strategy, than that would all have been for nothing.
“We aren’t party to negotiations. We are just putting forward some ideas which we hope are going to be incorporated.”
He said that the situation was becoming deeply frustrating and that the City had used its resources and wherewithal to come up with ideas, but that every time the idea was given to the government the ideas disappeared “like [into] a black hole” with little indication whether the idea had been picked up or not.
Standstill or deliver?
The UK has said publicly that it wants a two year transition period with everything left at a standstill, meaning it will effectively retain the same access to the EU as it has now.
But in negotiations, UK officials have been using the terms “proximity” and “mirroring”.
This has caused some confusion, since a transition period, as far as the EU is concerned, implies remaining inside the EU, while "mirroring" implies some kind of third countrystatus.
“That isn’t transition," said the bank executive. "You can’t be outside and continue to have access. You have to be inside to have transition.
“Once we start hearing stories like this we despair at even the easy bits getting agreed in the next few months, never mind the complicated stuff.”
A European finance minister confirmed that the mood in Brussels was indeed one of “disappointment and incredulity” and that EU 27 governments assume the UK's cabinet is so divided that the UK is unable to finalise a position.
The minister also confirmed that at a bilateral level there had been nothing concrete from the UK government, describing speeches by its ministers as "vague" and giving little indication over what the UK wants for financial services during or after a transition period.
Can the City pay for access?
As well as satisfying the European Commission, the UK must present a deal which can command the support of the European Parliament.
However, again there seems have been little indication to MEPs about what the UK might be looking for in negotiations and what kind of trading relationship it wants with the EU for financial services.
“It isn’t the first time we have had an unclear British position when handling these negotiations but this one [the UK’s position on financial services] is particularly difficult I think,” said Paul Tang MEP, who sits on the European parliament’s budget committee and committee on economic and monetary affairs (Econ).
“It never ceases to surprise me, but this approach is what we now expect from the UK side,” he continued. “But if this is the position I don’t see how you can bridge the differences. And if you would like to have some sort of agreement by March 2019, I don’t see how we can get there really, so that is very frustrating.”
Tang said he shared and understood the City’s frustrations over the government’s silence on UK aims, and suggested that banks group together to put forward ideas that would be mutually beneficial to the City and EU, rather than waiting for the government to establish a formal positon.
“If the City can’t wait for the government it should do it on its own to start with and come up with a signal that it is willing to not just take the benefits but also contribute to the cost of it,” said Tang. “It is in their interests to come together and put out a way in which they can contribute themselves, which is a way that the British government could enter negotiations.
“It is unknown territory for financial services, especially if you reject the [decisions of the] European Court of Justice, but I think it is a very good idea.”
'Extensive engagement'
A spokesperson for the UK's Department for Exiting the European Union told GlobalCapital that following extensive engagement with the industry and the EU, the secretary of state, David Davis, and the UK chancellor, Philip Hammond, have both set out UK considerations for the future relationship in financial services in a series of speeches.
But speeches are not policy and it now appears to be the case that the government has not laid out any details to City firms — either in public or in private — over what its firm negotiating position is, or if it even has one.
Financial services firms are effectively being asked to have faith that the UK government will come up with something. This is a big ask, given that the UK will leave the European Union in just over a year's time, in March 2019.
The European affairs ministers of the EU member states are set to agree a negotiating mandate on Tuesday, but according to the bank executive GlobalCapital spoke to, the word that his firm has received from EU negotiators is that transition talks are also a “complete car crash”.
Banks, meanwhile, appear to be being asked to wait for what appears to be a split UK cabinet to come to a consensus on the future trading relationship between the EU and the UK.
Continuing contracts
The paths of transition and trade are vital to the City, but banks have to start work now on operational issues.
Last week at the World Economic Forum in Davos, Goldman Sachs chief executive Lloyd Blankfein told the BBC that his bank was redrawing contracts between its UK entity and EU clients to reference, instead, its German subsidiary.
The government affairs head said that continuation of contracts was now a pressing issue for banks and that there has been little information from either side on how to proceed.
He added that banks were simply starting to have to “do their own thing” and decide how to make sure that there is as little disruption as possible to operations.
“We are all sitting around waiting for something to happen. The longer we that goes on, the less time there is to do something. We are in a total bind.
"Frankly, it’s a dereliction of duty to be aware of a problem but refuse to say one way or the other whether you are going to tackle it.”
The executive did, however, have praise for some UK politicians, particularly Conservative MP Nicky Morgan, the chair of the Treasury Select Committee and her Labour counterpart Hilary Benn, both of whom, he said seemed to understand the need for certainty.
“The UK’s financial services sector, which the Bank of England recently described as both a national asset and global public good, employs over a million people,” Morgan told GlobalCapital. “Many firms in this sector are concerned about the implications of Brexit. To provide much-needed certainty, the government should have published its position paper on the future of financial services.
“Radio silence from the government on any detail on its sense of direction and desired end state sends all the wrong signals.
"Financial services firms will be seriously concerned at the chronic state of uncertainty.”
Political bind
Nobody doubts the political bind facing prime minister Theresa May, with both her cabinet and party seemingly split down the middle over the same ideological differences on Europe that have haunted the Conservative Party for decades.
But it is high time the government put politics aside and finalised a firm position on the future of the UK’s most important industry before the clock runs out, said the bank executive.
“There are economic and political aspects to all of this and the politics has been trumping the economics every single time,” he said. “But the problem is we are all running out of time and that is the one diminishing asset no one can control.”
With additional reporting by Nell Mackenzie