EU referendum, brexit and the aftermath

Great piece in the FT today: Britain Must Accept Its Status As A Third Country @ https://www.ft.com/content/3f88d134-6a20-11e7-bfeb-33fe0c5b7eaa - For those behind the paywall:

YESTERDAY by: Jonathan Ford There is an old joke about British insularity and ingrained sense of entitlement towards the country’s European neighbours. “Fog in the Channel,” reads the text of a mythical weather report: “Continent cut off.”
Some fog appears to have descended over the Channel in relation to Brexit. As and when the UK finally leaves the EU — an event scheduled to happen pretty soon in early 2019 — it will need to establish a new trading relationship with the bloc. Gone will be the legal certainties of status accorded within the web of rules and laws that is the Single Market.
Britain will of course remain an important partner of the EU — not just in trade, but also politically and strategically. Legally though, it will have the same standing as Canada, Mexico or India. For all its geographical propinquity, it will be a “third country” just the same.
It is not clear whether this reality has wholly penetrated among those seeking to negotiate the position of the City of London post-departure. A mission led by Mark Hoban, a former City minister who runs a satellite body of the Square Mile’s most influential lobby group, TheCityUK, has been pushing an idea involving “mutual recognition” by the EU and UK of each other’s systems of regulation. This principle would be at the core of a putative financial services chapter embedded within the overall UK-EU trade deal.
There is a lot to like about this idea, which offers banks many of the benefits of the existing EU financial services “passport” in selling products cross-border to European customers. Concern about post-Brexit access has led a number of large banks — including HSBC and JPMorgan — to propose shifting some activities out of London. Mr Hoban’s proposal also gets round the fear that Britain might end up as a passive “rule-taker” of EU laws by stressing that while each side’s regulations should share the same underlying objectives (such as prudential soundness and customer protection), they need not be identical.
There is a muscular and impartial dispute resolution mechanism that could stop one side from capriciously denying recognition to the other. In extremis, it could impose penalties should either party contravene the deal.
The question is whether Channel-bound fog has in this case obscured the political difficulty involved in securing such a desirable arrangement. One problem, according to Nicolas Veron of the Bruegel Institute, is that it looks an awful lot like Britain taking what it sees as the nice bits of the single market while shrugging off the boring ones, such as freedom of movement.
In effect it would create a special “EU-lite” status for the UK, something the EU has explicitly vowed to avoid for fear that such an outcome might weaken ties among its own members.
There is no precedent in free trade deals for provisions that essentially give each side’s banks the right to trade on the other’s territory without a local licence. Take the EU’s proposed deal with Canada (Ceta), for instance. While this does liberalise financial services trade in certain limited circumstances, it contains no meaningful provisions leading to mutual recognition by each side of the other’s regulations.
Rather than pushing for unobtainable special status, Britain should have confidence in the strength of its economic ties to Europe and go with the grain of existing EU legislation. True, that means working with the admittedly imperfect legal concept of “equivalence”, which grants access to financial firms in third countries whose rules are deemed sufficiently similar.
The challenge is to fill in the gaps of what is presently a piecemeal regime so it covers most key financial sectors — including lending and insurance. There is no escaping that the EU will always control the keys when it comes to granting, or withdrawing, equivalence to third countries. The best approach then is to make any mechanism transparent and predictable, while basing it on legal outcomes not processes, so that neither side has to mirror the other’s laws. An alternative proposal just published by Barney Reynolds of Shearman & Sterling suggests one way that this might be done.
Britain needs to be realistic. It cannot both leave the EU and retain the legal certainty of market access that membership gave it. The best guarantees for the City are to be found not in complex trade deals, but the continued presence in London of global markets, to which EU financial services customers, as much as American or Asian ones, wish to gain access.
Policies that can achieve this should be the first concern of British ministers, rather than seeking special privileges from overseas.