LONDON (Reuters) - London’s blueprint for easy access to European Union financial markets after Brexit may not be feasible and banks should apply for EU licenses or be left “high and dry”, a Bundesbank board member said.
Andreas Dombret said on Thursday he doubted that a proposal by the City of London, Britain’s financial district, for “mutual recognition” or broad acceptance by Britain and the EU of each other’s financial rules, is actually possible.
Such a move would undermine national sovereignty by giving substantial powers to technical committees of supervisors to make it work, Dombret told an event at UK Finance, Britain’s domestic banking industry body.
“The substantial effort necessary ... may outweigh the benefits to society,” Dombret said, adding that free trade in financial services was becoming less and less likely and it was time to face facts.
Financial industry representatives told Reuters last week that European Commission officials have said that the mutual recognition proposal will not fly as it confers the benefits of single market membership on a non-EU country.
Other UK financial industry officials have said there is interest among EU states in mutual recognition, and Britain’s Financial Conduct Authority said on Monday it is a familiar concept for the bloc.
But Britain’s government has yet to detail what it wants for financial services in trade negotiations with the bloc.
Nicky Morgan, chair of the British parliament’s Treasury Select Committee, called on Thursday for City minister John Glen to publish the government’s position paper to “provide some much needed clarity” for banks to help with their Brexit preparations.
UK Finance Chief Executive Stephen Jones said it’s “entirely possible” to construct a new trade deal with the bloc that preserves benefits of close alignment without sacrificing political and regulatory autonomy.
Without a bespoke trade deal, Britain faces having to continue copying EU rules like Norway and Switzerland for financial market access.
Dombret also gave a blunt warning to banks about relying on a transition period to delay hard decisions on licenses and staff moves to new EU hubs.
Even if the EU and Britain agree on a transition deal by March to bridge Brexit and new trading terms, it may not give the legal certainty that cross-border banks crave, Dombret said.
The sector would still have to wait until October to see if there is agreement on future trading relations as well.
“The transition phase is not a safety net,” Dombret said.
It might be better to focus on making licensing procedures as smooth as possible given that a “no deal” on future financial services trade is a realistic outcome, he said.
European regulators are looking at more than 100 financial firms operating from Britain that potentially need a new or modified EU license, he said.
The European Central Bank’s banking supervisor said on Wednesday that eight banks have taken formal steps to apply for a license, with four others planning to extend operations in the euro area.
“Those who do not complete their plans and start implementing them by March this year risk being left high and dry by Brexit one year later,” Dombret said, adding the advice also applies to European banks with branches in Britain yet to make license applications to the Bank of England.
The BoE proposed in December that EU banks in Britain continue operating as branches without a costly conversion into subsidiaries if there is similar cooperation with EU regulators after Brexit.
Dombret said such an approach, reciprocated already by the ECB’s pragmatic policy stances on licensing, can be an important contribution towards a smooth transition.
Reporting by Huw Jones; editing by Alexander Smith and Adrian Croft