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(Reuters) — Britain’s future financial gateway into the European Union could be slammed shut if the country does not apply EU rules that would come into force after Brexit, bankers say.
More than 300 banks, insurers and asset managers in Britain have already spent millions of pounds setting up new hubs in the EU to cope with Brexit fallout.
But they still want some direct access to the EU from Britain after Brexit to minimize costly duplication, and U.K. legislation is needed to ensure this.
Their warning also comes as Britain faces fundamental choices on the regulatory regime it wants post-Brexit to keep London’s status as a top global financial center that brings in billions of pounds in tax revenue.
If Britain leaves the EU on Oct. 31 with a deal, the country’s current unfettered access to its biggest export market for financial services would likely continue until the end of 2020.
Without a deal, Britain’s financial sector had hoped it could rely on the EU’s “equivalence” system to keep doing business with the EU directly from Britain.
Equivalence refers to Brussels’ interpretation of whether U.K. financial rules are close enough to the EU’s regulations to avoid unfair competition or inadequate consumer protection.
Britain says it will be “equivalent” on Day One of Brexit given that most of the EU’s current financial rulebook is enshrined in British law.
But bankers fear that a number of new EU rules due to come into force in coming months are yet to be passed by Britain’s parliament, leading to a lack of equivalence and thus potentially blocking EU access.
The European Commission had no comment.
Conor Lawlor, director of international and Brexit policy at trade body UK Finance, said his organization would continue to work closely with the government and regulators to get the necessary rules and laws in place to minimize potential disruption to customers.
Mr. Lawlor said the industry was as prepared as it could be with respect to the steps that it can take unilaterally.
“There is a very direct relationship between regulatory and legal autonomy and market access. The more you have of one, the less you have of the other,” he told Reuters. “If the government doesn’t have the powers to enact legislation that reflects the European rulebook, that could make future debates over market access more difficult.”
Divergence or convergence
Britain’s parliament reconvened on Wednesday after the Supreme Court, Britain’s highest judicial power, ruled that its suspension earlier this month was unlawful.
But it is not clear if parliament will approve the outstanding EU items or revisit a Financial Services Bill covering future EU regulation, seen critical to the smooth running of the U.K. finance industry after Brexit.
Britain’s finance ministry said it would ensure there was a fully functioning financial services regulatory regime from the day the country leaves the EU.
The two remaining items from the EU’s existing rulebook will complete their “onshoring” into U.K. law once the suspension of parliament ended, a finance ministry spokesman said.
But a parliamentary bill to onshore pending EU financial rules has stumbled, and bankers fear that the government may not commit to tracking these incoming rules, thus putting equivalence into doubt.
The legislation could get caught up in an unfolding debate about regulation in Britain and whether to keep tracking the EU or take a more independent approach.
“If you have a government intent on divergence, not convergence, they might not put any priority on it at all,” a senior official at an international bank said. “In fact it might be rather odd for potentially a new government coming in and saying it wanted a full break with the EU in a no-deal Brexit, because this would be echoing EU legislation into U.K. law.”
The finance ministry was unable to say that a specific financial services bill would be resubmitted.
“Details of future legislation will be set out in the next Queen’s speech,” it said, referring to when the head of state announces legislative plans at the start of a new parliamentary session.
It is unclear when the speech will be delivered, as Britain could hold a general election in coming weeks.
Post-Brexit plans for a new Financial Services Bill to turn so-called “in-flight” rules currently being finalized by the EU into U.K. law will now not be possible until after a general election.
Failing to turn the “in-flight” rules into U.K. law would leave gaps that Brussels could use to deny equivalence, the bankers and industry representatives say.
Meanwhile, Britain’s financial services minister John Glen told a UK Finance dinner last week that Brexit gave an unprecedented opportunity to look again at a U.K. regulatory regime that will no longer be subject to EU horse-trading.
“In some cases, we may choose to pursue the same outcomes. In other cases, we may decide to do things differently,” Mr. Glen said.
The U.K.'s insurance sector is moving £61 billion ($75 billion) worth of business to financial centers in the European Union due to Brexit, Bloomberg reported. The Bank of England said that about £5 billion worth of insurance policies will still be in the United Kingdom if Brexit takes place on Oct. 31. Lloyd’s of London said that it would transfer its entire £3 billion worth of EU business by Oct. 31, 2020.