Brussels likely to strike partial access deal for the City, says French minister

Brussels is likely to grant the City partial access to its financial services market, a French minister has said, in an apparent softening of rhetoric after months of deadlock.

Clement Beaune, a key member of Emmanuel Macron’s government, said the European Union may grant a ruling under its so-called equivalence regime that could allow the UK’s financial sector to do business across the Continent.

Speaking to Bloomberg, he said: “There will probably be partial equivalence.”

Mr Beaune added that the City will not be able to have the same access as before Brexit. He said: “[The access] will be revocable, provisional, unilateral on the part of the EU. So it is not the same legal framework at all.”

However, the comments are still likely to spark talk of a climbdown after weeks of stonewalling by the European Union amid fears no access would be granted at all. It comes after Bank of England governor Andrew Bailey warned Brussels against plotting a protectionist power grab with tough new laws of “dubious legality” aimed at stealing business from the City.

Mr Bailey said earlier this week that the European Union could seek to seize part of London’s prized derivatives clearing market in a “very controversial” legal effort that Britain must “resist very firmly”.

The bloc has long sought to prize euro clearing away from the City, but Mr Bailey said that this alone would not be large enough to work as a sustainable market. He suggested the EU could also try to shift other parts of London’s business by diktat to reach critical mass.

City lawyers said that Brussels will struggle to come up with a framework capable of forcing banks to move.

Michael McKee, head of financial services regulation for law firm DLA Piper, said: “As Mr Bailey says, this would not typically be regarded as a proper approach legally.

“Legally this is business done ‘in the UK’ and so for the EU to shift this business they would typically either have to prohibit European banks and corporates from doing this business with London or threaten some sort of sanctions against them.”

There were fears EU banks would lose access to Britain’s clearing houses after Brexit, threatening London’s position, but the EU extended access until mid-2022 after warnings of serious disruption if services were cut off.

Clearing houses process financial products worth hundreds of billions of pounds a day, acting as middlemen between buyers and sellers for financial assets. The City is the European leader in clearing, with the London Stock Exchange’s LCH arm dominating the continent’s €735 trillion (£658 trillion) annual market.

Simon Morris, a financial services partner at law firm CMS, said the EU now has two legal levers to pull.

He said: “It could make this unprofitable by requiring EU banks to hold greater capital to protect against the imagined greater risk of clearing taking place in London rather than Frankfurt.

“It could also say that the UK’s derivative clearing is systemically important to the EU and threatens eurosystem stability because it’s no longer supervised by the EU and so must be curtailed, if not banned.”

However, neither of these approaches would necessarily be able to force enough other business to shift along with euro clearing for the market to function.

UK financial services lost passporting rights giving firms access to the single market on December 31, and the trade deal agreed days before the Brexit transition period ended largely excluded the industry.

On Friday a new European Commission working group will meet for the first time to discuss moving euro clearing. One City grandee said he is pessimistic that EU officials will grant equivalence to UK firms.

He said: “Everything I hear in the corridors or power, in the French and German treasuries, is that they will never grant long-term equivalency to London.”