Keith Mullin

The referendum in the United Kingdom on membership in the European Union may have taken place a decade ago this year, but the subject continues to be ferociously divisive in the UK and elicits passionate and fiercely tribal reactions from both sides of the fence. That much is clear with regard to the UK government’s efforts to redraw relations with the EU.

Against a constant barrage of protest, the government has negotiated the UK’s re-entry into the EU’s Erasmus+ student exchange programme from next January, for example, as part of broader discussions around reciprocating student qualifications and facilitating mobility for young people. And myriad conversations are being held around everything from defence, security and foreign policy alignment, to energy and climate policy, food exports, general trade and more. Rejoining the EU single market and customs union are political red lines. For now.

Under the current gravitational circumstances, I’m not sure if I was shocked ( or just depressed by what I had sensed was always going to be the case ) by the government’s apparent decision to carve financial services out of efforts to re-align with the EU. And whether that in turn was down to efforts by the powerful UK financial services lobby – which is stridently pushing for regulatory independence – or whether it just suited the government’s UK financial services policy reform agenda.

A powerful solution

I say that not just because the UK financial services sector ( which includes the City of London ) provides the government with something like 13% of its total annual tax take, a precious asset in the context of the UK’s fiscal black hole.

It is also because the government has set itself on a path of lowering the regulatory burden on financial services while attempting to securitize UK savings to boost UK securities markets. This mission includes overdone anxiety to attract more IPOs to the UK and forcing higher domestic retail and institutional inflows into UK equities. It’s an agenda that creates a natural set-off against the EU’s more conservative approach to regulating financial services that the British government would want to avoid to keep its financial services reform agenda on track.

In the context of securing broad European financial and economic sovereignty, though, and creating a bulwark against US dominance of critical elements of Europe’s financial infrastructure in a rapidly changing geopolitical environment, UK + EU offer a more powerful solution.

An open letter to the European Parliament signed by 70 academics under the umbrella of the Sustainable Finance Lab, an independent academic think tank, underlines some deep-rooted concerns in this regard. Specifically, the domination of Europe’s payment system by a handful of US payment providers, which the letter says “exposes European citizens, businesses and governments to geopolitical leverage, foreign commercial interests, and systemic risks beyond Europe’s control”. The letter was written to advocate for more urgent work to make the digital euro a reality, but its points are also relevant in a broader context.

These kinds of realities should be unleashing centripetal forces culminating in a drive for regional solutions. But instead, the UK financial services lobby is pursuing a US agenda via the British American Finance Alliance, a lobby group of 22 US and UK trade associations and industry organizations focused on deepening regulatory and policy cooperation between the US and UK in financial services.

The Farage factor

The UK Chancellor of the Exchequer and US Treasury Secretary established the Transatlantic Taskforce for Markets of the Future last September “to enhance collaboration on capital markets, digital assets and other innovative financial activities”. The task force is working on recommendations to enhance collaboration across these areas. The UK will firmly nail its colours to the mast of US financial deregulation, another reason to keep the EU at arms’ length. But attempting to force an alliance with the US, given its rhetoric and actions, is potentially reckless.

Of course, another reason for the UK financial services carve-out from closer EU relations – and a reason why other initiatives might fail too – is that the EU may not want to finalize discussions with the UK at a time when Nigel Farage’s Reform Party – a re-constitution of his former Brexit Party updated around a vicious anti-immigration agenda – is riding high in the polls.

This is real. If the in-process proposal to make it easier for food and drinks exports to flow back and forth between the UK and EU becomes final, I gather a clause has been written in that would force the UK to pay substantial costs if a future Farage-tinged government in league with the equally Eurosceptic Conservative Party exits any re-negotiated agreements, which both have said they would.

The world is changing. In the context of financial services, regardless of who has the bigger sector or who has the greater need for whom, this is not the time for insular, fragmented approaches, no matter how self-serving they might appear to be in the short term.