EU risks 'serious' impact on financial markets without trade deal, watchdog warns

The EU should stop prevaricating and enter talks on a financial services trade agreement with the UK or face “serious” consequences for global markets, the head of Britain’s financial watchdog has warned.

Andrew Bailey, chief executive of the Financial Conduct Authority (FCA), told an event in the City on Monday evening he did not buy Brussels’ position that frictionless cross-border trade between banks post-Brexit would be impossible to achieve.

The EU’s chief negotiator Michel Barnier has ruled out special arrangements for financial firms, while specific proposals for mutual recognition drafted by City bosses have also been knocked back by Brussels in recent weeks.

The EU risked triggering “serious adverse consequences” on its current path, Mr Bailey warned. He argued that given reciprocal market access was the starting point, revoking this would “amount to a decision to close market access, not a decision about whether to open it”.

Mr Bailey pointed out that the EU had demonstrated a “commitment to global free trade” by itself drafting a financial services chapter to its stalled ‘TTIP’ trade agreement with the US - although this was thrown out by Washington. This work could form “a good starting point” for Brexit negotiations on financial services, he said.

Mr Bailey also noted recent draft EU proposals on regulation of fisheries after Brexit, which included reciprocal access to waters, a high degree of regulatory convergence and a bilateral EU-UK partnership agreement.

“It’s not for me to opine on fishing policy,” he said. “But, the key point is that this sounds like the fishing equivalent of open financial markets.”

Creating substantial regulatory divergence in financial services would “increase risk” and not reap competitive benefits, he further argued, telling City bosses that an international commitment to open markets, strong rules and supervision had helped maintain financial stability since the 2008 crisis.

Mr Bailey argued it was in the “mutual interest” of both the UK and the EU to strike a deal, with some £26 trillion worth of derivative contracts and 36 million cross-border insurance policies potentially thrown up in the air without an agreement.

Any “abrupt close-out of positions” would likely damage EU firms more than British ones due to “the volume of activity” flowing through London, he said.

The bloc risked losing out from any decision to “disconnect the EU from the benefits of global markets,” he added.

“Whatever view you take on Brexit, I think we all agree that financial stability comes first as a common objective.”

Both the Bank of England and consultant EY have predicted around 10,000 City jobs could go on day one of Brexit if no deal is agreed.

Mr Bailey said the City needed to see agreement on a transition period by the end of March. He urged equivalent regulators in the EU to join the FCA in agreeing a memorandum of understanding supporting transition and efforts to establish a post-Brexit regulatory regime.

Quoting reggae star Jimmy Cliff’s hit song, Mr Bailey said: “The moral of the story, to borrow a quote - ‘You can get it if you really want’”.