The UK financial services industry has been in despair since the referendum, baffled by the lack of government clarity on financial services so far in the Brexit process.
But Hammond’s speech on Wednesday laid out a clear message about the UK's negotiating objectives.
The Chancellor called for an arrangement backed by “principles 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”.
He added that, although the UK and EU would be “separate jurisdictions”, both would need to maintain a structured regulatory dialogue to discuss rules proposed by either side.
Amazed and surprised
The Chancellor's ambitious proposals were largely welcomed by the financial services industry.
A senior bank executive who has been dealing with the government and the EU throughout the Brexit process said he had been “amazed and surprised” by a speech that had in effect encompassed all the City’s private wishes for Brexit.
“This is exactly what the industry has been telling the Treasury it needs to do for six months. The problem is everyone has seen this as a regulatory issue, but financial services is really a trade issue,” he said.
“No trade negotiation starts with you asking for what you think you might get. You ask for far more than that and both sides aim to get something they ask for.
“This is the right way to do it, and the industry has got from Philip Hammond pretty much everything it asked for on mutual recognition and dispute settlements
“We are all pleased that the Treasury and government have accepted these arguments.”
The EU is understandably not so keen on giving the UK everything it asks for on financial services and, even before Hammond made his (widely trailed) speech, the French finance minister, Bruno Le Maire, said financial services could not be part of any trade deal.
Other EU ministers have also said that, as financial services have not been part of free trade deals in the past, they could not be part of one for the UK.
Tried it twice
But Hammond pointed out in his speech that the EU has pursued free trade agreements in the past that included financial services, most notably with the US and Canada.
Given the UK and EU already have aligned regulatory environments, negotiations should be easier than those with completely divergent regulations.
“The EU itself pursued ambitious financial services co-operation in its proposals for [the Transatlantic Trade and Investment Partnership],” said the Chancellor, adding that TTIP and the Comprehensive Economic and Trade Agreement (CETA), a planned deal with Canada, originally described a deeper partnership that would have gone beyond a traditional free trade agreement.
“We know because, back then, British and French officials worked hand-in-hand on the proposals with the Commission,” the chancellor said.
The bank executive said the financial services industry felt France was opposing a free trade agreement on financial services out of self-interest and hoped banks would move operations to Paris.
The banker also pointed out that Michel Barnier, Europe's chief Brexit negotiator, was supposed to be determining the Commission's stance, not the French finance minister.
“The Commission is ideological and doctrinaire, and this is the approach which it is starting from, which is fair enough. But that doesn’t get you to a solution unless they are planning to just roll the UK over like they do to other countries,” the bank executive said.
“All this depends [on] how the Commission sees the relationship with the UK, as a partner or as an enemy. I would be surprised if they saw the UK as a source of Europe's problems.”
Parliament and precedents
The European Parliament will also have a say in the post-Brexit environment and, while it is understood to accept that there is no precedent for a free trade deal that includes financial services, the idea is not out of the question for some.
“So far none of the trading agreements Europe has with any other country includes financial services, so I am not sure a new EU/UK trading agreement would cover that,” said a source in the European Parliament.
“It would be a first. In that regard, it would be something to hope for.”
'We're bullish'
The source continued that it was hard for the EU to take a position on a potential free trade deal when the UK still had not outlined a clear position.
But Hammond’s speech is being seen by the City as a watershed moment, which finally gives an indication of a firm UK government position on financial services after Brexit.
“We were told after the Prime Minister’s speech that the Chancellor would raise the issue of financial services and that Treasury owns this bit of policy, and we now assume that the Treasury is running this for the whole of the government,” said the bank executive.
“We’re quite bullish. Everyone realises there is a long hard slog ahead, but at least we have got the UK government to commit to a positive strong agenda rather than going for the lowest common denominator."
GC