David Davis, the Brexit minister, has warned Britain’s partners not to use its departure from the EU to weaken the City of London, suggesting it would backfire and destabilise “fragile” European markets.
Chancellor Philip Hammond made similar warnings on Thursday, saying that if the City were undermined by Brexit it could spread instability across Europe and even to the US.
Mr Davis, speaking in the House of Commons, said Britain wanted to ensure “a smooth and orderly exit from the European Union”, adding: “It would not be in the interests of either side, either Britain or the EU, to see disruption”.
He added: “We have to treat as absolutely central to what we do maintaining the stability of both the City but also the European financial markets. The European financial markets are a little fragile over the last few years.”
Mr Hammond told the Commons Treasury committee this week that regulators in the US, Britain and the EU were working to prevent Brexit from posing a “systemic risk”, either domestically or “globally”.
We have to treat as absolutely central to what we do maintaining the stability of both the City but also the European financial markets. The European financial markets are a little fragile over the last few years
The chancellor added: “All parties will want to make sure what is done supports and underpins financial stability and does not challenge it.”
Ministers are looking to apply a transitional period after Britain’s expected formal exit from the EU in 2019, prolonging existing trading arrangements for a number of years until a final free trade agreement is in place.
Mr Davis confirmed the government was looking at “all possible options” with the aim of negotiating “a smooth and orderly exit from the European Union”.
The argument that London is Europe’s financial centre — supporting banks, manufacturers and consumers across the EU — will be challenged in some EU capitals, which want to build up rival centres such as Amsterdam, Frankfurt and Paris.
But Andreas Dombret, an executive board member at the Deutsche Bundesbank, warned in London on Thursday that EU policymakers should not penalise the City of London to benefit other financial centres.
“A politically induced uneven playing field that is skewed to favour certain financial centres over others would inevitably prove counterproductive in the medium to long term, as that would open loopholes and opportunities for regulatory arbitrage,” he said.
Meanwhile, Mark Garnier, a minister at the Department for International Trade, told the British Banking Association’s annual conference that the government “knows that the banking industry needs to have something that gives them access to the single market”. He added: “We have to find a mechanism that behaves like passporting and has greater security than equivalence.”
A significant battle will be for the City’s vital eurozone clearing functions. Mr Davis told MPs that keeping hold of the City’s role was one of the British government’s “major aims” in negotiations.
Senior European officials, including the French government, have warned that London will lose its role as a hub for eurozone clearing activities following a failed case by the European Central Bank to repatriate clearing to the single currency area last year.
Mr Davis said retaining clearing would form a key part of its exit talks with Brussels: “We start at the point we leave with absolute equivalence, because we meet all the requirements at this point.”
Although many financial companies hope to retain their current EU “passporting rights”, British ministers and Brussels officials concede that would be impossible if, as expected, the UK leaves the single market.
Mr Hammond this week tried to keep open the option of continued single market membership and the retention of passporting rights for the financial sector, but Mr Davis’s talk of “equivalence” suggests the debate has already moved on.
Under an equivalence regime, Britain would seek access to EU markets on a sector-by-sector basis by demonstrating it had a similar regulatory regime to that in the other 27 member states. The European Commission would be the ultimate arbiter.
London processes $1.2tn a day of deals denominated in a variety of currencies. Euro-denominated swaps account for just over half the total, according to the Bank of England.
Critics have warned that any fresh attempt to remove euro clearing from London would fragment the global financial system and hurt the euro’s ambitions to become a true global reserve.
Meanwhile, Mr Davis said the government would not seek to limit “the free movement of brain power”, insisting the UK would not restrict high-skilled immigration having left the EU.
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