Friends again, but EU and UK heading nowhere fast on finance

BRUSSELS/LONDON — The EU’s relationship with the U.K. under Boris Johnson and Liz Truss deteriorated so badly that at least a year will be spent rebuilding trust on financial services cooperation rather than ushering in closer ties, according to diplomats and officials on both sides of the English Channel.

While the conclusion of a bruising two-year standoff over the unrelated topic of trade with Northern Ireland means there’s hope London and Brussels can slowly start to heal their fractured friendship, the politics are stacked against substantial progress any time soon.

The European Commission signaled a thaw in relations in May when it dusted off the two sides’ Memorandum of Understanding on financial services, seen as a step toward talks ― but a combination of just how bad things had become plus looming elections complicates matters.

Although Britain left the EU in 2020, the Brexit deal did not include provision for financial services cooperation, meaning the City of London’s global firms lost their unfettered access to Europe’s single market. Rishi Sunak’s arrival as U.K. prime minister has seen a more constructive approach to relations with the EU than under his predecessors Johnson and Truss.

Election delay

The two sides are not helped by the political calendar, which is acting as a disincentive to speed things up.

On the British end, a general election is due by January 2025 and with the latest polls indicating a potential victory for the opposition Labour Party, officials may be reluctant to put anything in place if it’s only to be ripped up by a new government.

Next June there are elections in the EU too, and Brussels’ top officials are already jostling for plum jobs, meaning they see little to be gained by making concessions to Britain.

Even without that uncertainty, such is the bureaucracy nothing can move very quickly anyway. The MoU ― which in practice is just a list of shared objectives thrown together in March 2021 when the U.K. and EU were negotiating a broader trade deal ― needs to be signed off by European capitals, a formality expected to take four-to-five weeks. Then the two sides will draw up plans for a regulatory discussion forum, which won’t start until after the summer.

A similar twice-yearly talking shop already exists between the EU and the U.S., and while sitting around a table together is progress compared to recent years, the EU and U.K. would have time for just three forums before a changing of the guard in Brussels — not much time to rekindle a healthy friendship.

Back on speaking terms

Financial services cooperation became collateral damage of the two sides’ fallout over trade with Northern Ireland in 2021, denting the City’s immediate hopes of a close bond with the EU. It meant a near-total cut-off for the City from EU markets after Brexit. Only London’s clearinghouses enjoy access to EU clients.

Since the Commission brought the MoU out of hibernation, financial services officials from the two sides are back on speaking terms.

The relationship has quickly become friendlier and more positive, the diplomats and officials said, with a markedly warmer trip to London for Mairead McGuinness, the EU’s financial services chief, in May compared to a similar visit in 2021, when there was bad blood over euro clearing.

An EU official who accompanied the commissioner said in 2021 "there was unfinished business which led naturally to a sense of tension in the air" but that had now changed. "There is less tension in the relationship now and there is a process in place to sign off on the MOU."

The official, who was granted anonymity so they could speak freely, said: "We are in a much better place already — we can have strong discussion, and while we don’t always have to agree, we can disagree as friends respecting each other’s different interests."

Bruised trust

The overall atmosphere might benefit from waning ambition in Brussels to wrestle the clearing of euro-denominated interest-rate swaps out of London — until now a major Brexit flashpoint.

The Commission still wants to engineer a shift, but stopped short of imposing punitive measures on banks and investors in plans unveiled in December.

EU capitals are now leaning toward making a requirement for banks and investors to set up accounts at European clearinghouses a fallback option.

And while there’s a lot to catch up on as both the EU and U.K. make changes to core finance rules, talks are likely to focus on less contentious areas: green finance, digitalization, anti-money laundering, and financial stability.

Officials may dodge the terms “equivalence” or “divergence” for some time to avoid triggering old quarrels, so candid debate on where the two sides are heading in different directions will likely have to wait.

David McCarthy, head of international regulatory affairs at the Investment Association, which represents the U.K.’s fund industry, called for the forum to focus on “finding common solutions to common challenges.”

“Whether this is sharing lessons on how to encourage greater retail participation in European markets, promoting international coherence in sustainability-related disclosures, or identifying how the utilization of new technology can drive innovation across the sector, there is no shortage of topics to work together on,” he said in an emailed comment.

The U.K. financial industry hopes that eventually leads to a closer relationship.

“The private sector of course also hopes that in time the two sides will build ever stronger trust in each other’s regulatory and supervisory frameworks and work together to align with each other, often following global standards, and minimize frictions between their respective regimes," said Nick Collier, managing director of the Brussels office for the City of London.