Britain and the EU are expected to reach a free trade deal this week after it left the union in January and will lose full access to the block beginning 2300 GMT on December 31, according to Reuters. Britain has been the EU’s biggest financial services customer, worth about 30 billion pounds a year, cementing the city of London as one of the biggest financial centers worldwide. Here are the expected impacts and changes if Britain exits the EU:

  • Access to EU
    • In 2021, access to British financial firms to the EU will end and be replaced by an EU system called equivalence. 
    • The equivalence system will allow London financial firms’ market access to the EU but exclude financial activities such as retail banking.
    • Access to the EU under the system of equivalence can be withdrawn at one month’s notice, making it unpredictable.
    • Faced with limited or no direct access, London’s financial firms have already moved 7,500 jobs and a trillion pounds in assets to new EU hubs.
    • Trading in stocks, bonds, and derivatives will be split into less efficient British and the EU “pools” if the system of equivalence will not be in place by January.
    • Britain and the EU have already agreed that asset managers in London can pick stocks for funds in the EU.
  • EU Financial Firms Operating in London
    • Britain will allow EU firms to continue operating in London for three years, hoping they will apply for permanent UK authorization.
    • Britain will unilaterally allow EU financial firms to provide selected services like credit ratings directly to British customers.
    • Britain will allow UK investors to use share trading platforms in the bloc to maximize choice.
  • Divergence Issues
    • Brussels has not decided to offer equivalence more broadly because it wants reassurances that British rules will remain the same as those of the bloc.  
    • Brussels fears that Britain may apply rules that give it a competitive edge over the EU.
    • Britain will not apply some EU rules and could change some like insurance capital norms and introduce its own version of pending European regulation for investment firms. 
    • Britain has begun a root-and-branch review of regulations to make listing rules friendly to tech firms worldwide.
    • Britain will not lower standards and will stick to rules agreed at the global level.
  • Whether London’s Reign in Europe will End
    • London still has a lead over rivals Frankfurt, Milan, and Paris on derivatives, stock trading, and currencies and hosts hundreds of significant asset managers and dominance will not immediately.
    • Shifting capital out of London than is necessary would lead to costly market fragmentation.
    • In the long-term, if the EU remains tough on equivalence and its financial centers reach a critical mass in crucial asset trading, London’s attractiveness as a financial hub would diminish.

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