The week in outline:
The week was dominated by the Salzburg summit and the apparent stand-off between the UK and the EU on Brexit (see for example the statement at Documents 1 below from Donald Tusk – ‘the suggested framework for economic cooperation will not work. Not least because it risks undermining the Single Market’ and the statement from Theresa May at Document 2 below). The impasse in the negotiations relates to the outstanding terms of the Withdrawal Agreement (WA) itself and to the annexed non-binding political declaration on the framework for the future relationship. The critical issue is Northern Ireland on which the joint report in December said - ... “In the absence of agreed solutions, the United Kingdom will maintain full alignment with those rules of the Internal Market and the Customs Union which, now or in the future, support North-South cooperation, the all island economy and the protection of the 1998 Agreement.
...In the absence of agreed solutions, as set out in the previous paragraph, the United Kingdom will ensure that no new regulatory barriers develop between Northern Ireland and the rest of the United Kingdom, unless, consistent with the 1998 Agreement, the Northern Ireland Executive and Assembly agree that distinct arrangements are appropriate for Northern Ireland.”
The UK White Paper or ‘Chequers proposals’, with its bifurcated split between preferential single market membership for goods but a non-preferential third country relationship in services, is designed to resolve these conflicting tensions in the December report. The EU has rejected this as a solution and insists on binding legal obligations for a ‘Northern Ireland’ backstop in the WA treaty, although it is working to improve the wording of the backstop provisions in the draft treaty published in March.
Financial services (FS) are not covered in the WA and, as explained in previous updates, the UK has abandoned any attempt to negotiate preferential access in FS (which might have been flagged in the political protocol). (Further commentary on this aspect was published this week in the parliamentary report at Document 3 below). For financial services, therefore, the key impact of recent developments is the increasing risk of a ‘no deal scenario’.
The key issue is no longer the terms of the negotiated agreements but the timescale for the UK’s exit from the EU’s single market/DRC under its FS legislation. This depends on whether the WA – including its transitional period (TP) - is agreed, ratified and comes into effect before the UK’s exit (due on 29/3/19). Without the TP, single market DRC will cease abruptly at exit; EU-27/EEA firms already have the security of pre-planned/announced transitional relief under the UK regime (see our previous updates) but UK firms face the threat of a ‘cliff edge’ without either the EU having made equivalence decisions under their third party regime and without pre-announced/planned transitional relief from the EU side. This threat of a last minute failure in the planned TP with all single market DRC being turned off overnight is alarming, and the rising risk of such an outcome is a major concern.
If the TP does take effect, it will preserve UK participation in the single market, and its system of DRC in FS, until the end of the TP (on 31/12/20 according to the draft WA/current plans). It now seems very likely that the UK would drop out of the single market in FS at the end of the TP and that all related DRC between the UK and the EU-27/EEA would effectively be turned off at that point. One can anticipate that if there was good progress in the post-Brexit negotiations on the treaties to make up the future relationship (according to the framework outlined in the political declaration), there were be an agreed regime to provide a smooth transition, with transitional measures on both sides and time for EU equivalence decisions to be put in place for a smooth transition.
There would, of course, be a risk (despite earlier agreement of the WA) of a ‘no deal scenario’ and cliff edge at the end of the TP. This risk of a failure to agree a future deal involves essentially the same outcome as the WA failure described above.
For the moment, however, all eyes are on the current negotiations and the increasing risk that the UK exits the EU next year without a WA or TP, largely on account of a failure to resolve the Northern Ireland conundrum (as seen in the December joint report quoted above).
EC: Statement by Donald Tusk
Quotes form the statement made on 19 September:
“The Brexit negotiations are entering their decisive phase. Various scenarios are still possible today, but I would like to stress that some of Prime Minister May's proposals from Chequers indicate a positive evolution in the UK's approach as well as a will to minimise the negative effects of Brexit. By this I mean, among other things, the readiness to cooperate closely in the area of security and foreign policy. On other issues, such as the Irish question, or the framework for economic cooperation, the UK's proposals will need to be reworked and further negotiated. Today there is perhaps more hope, but there is surely less and less time. Therefore, every day that is left, we must use for talks. I would like to finalise them still this autumn. This is why, at tomorrow's meeting of the twenty-seven, I will propose calling an additional summit around mid-November.”
Quotes from statement made on 20 September:
“At our EU27 working lunch today we had a good discussion on Brexit, which once again reconfirmed our full unity. Let me highlight three points.
First, we reconfirmed that there will be no Withdrawal Agreement without a solid, operational and legally binding Irish backstop. And we continue to fully support Michel Barnier in his efforts to find such a model.
Second, we agreed to have a joint political declaration that provides as much clarity as possible on the future relations. Everybody shared the view that while there are positive elements in the Chequers proposal, the suggested framework for economic cooperation will not work. Not least because it risks undermining the Single Market.
Third, we also discussed the timetable for further negotiations. The moment of truth for Brexit negotiations will be the October European Council. In October we expect maximum progress and results in the Brexit talks. Then we will decide whether conditions are there to call an extraordinary summit in November to finalise and formalise the deal.”
PMO: Statement by Theresa May
The statement given by Theresa May on 21 September 2018 following the Salzburg summit has been published. The full statement can be accessed here.
“The first is our economic relationship after we have left.
Here, the EU is still only offering us two options.
The first option would involve the UK staying in the European Economic Area and a customs union with the EU.
In plain English, this would mean we’d still have to abide by all the EU rules, uncontrolled immigration from the EU would continue and we couldn’t do the trade deals we want with other countries.
That would make a mockery of the referendum we had two years ago.
The second option would be a basic free trade agreement for Great Britain that would introduce checks at the Great Britain/EU border. But even worse, Northern Ireland would effectively remain in the Customs Union and parts of the Single Market, permanently separated economically from the rest of the UK by a border down the Irish Sea.”
House of commons Exiting the EU committee: THe progress of the UK’s negotiations on EU withdrawal (June to September 2018)
The Committee's report discusses aspects of the White Paper and includes a section on financial services and equivalence. It suggests that "enhanced equivalence is an ambitious goal … it is a pragmatic negotiating objective, given the contribution that the financial services sector makes to the UK economy and its importance to the economies of our trading partners in the EU". The full report can be accessed here.
“It is unclear to what extent trade in services can be separated easily from goods, as many exported goods include a service or maintenance contract. This is especially true of data and communications products such as smart phones, but it is also true of manufactured goods such as lifts or aeroplane engines, which require engineers to fit and maintain components on an ongoing basis. Catherine McGuinness told us that her members have said “that the real value and the profit that they make on a number of the goods that they sell is almost entirely the service contract”. She described the division of goods and services as “a false distinction”.”
“Catherine McGuinness said that the City of London Corporation “did not welcome the White Paper and the way that it treats financial services”. She was concerned that equivalence does not cover the whole of the financial services sector and that the European Union could withdraw it for political as well as legal reasons.”
“Witnesses were sceptical that the Government would be able to negotiate an enhanced form of equivalence. Catherine McGuinness described it as an “uphill task to persuade the EU27.107 Huw Evans said that “it is a very ambitious ask” because the Government was asking for the European Union to let the UK have a say over how the third country equivalence regime would operate in future, “whereas… the equivalence mechanism in the third country regime is something that the EU considers proprietary. It is theirs.””
EC: State of the Union address
The EC has now published the text of the address, given on 12 September 2018, in which Jean-Claude Juncker refers to aspects of Brexit. The full text can be accessed here.
“In the past months, when we needed unity in the Union, Britain was at our side, driven by the same values and principles of all other Europeans. This is why I welcome Prime Minister May's proposal to develop an ambitious new partnership for the future, after Brexit. We agree with the statement made in Chequers that the starting point for such a partnership should be a free trade area between the United Kingdom and the European Union.”
Other publications from the RegZone Brexit news feed
EC: Statement by Michel Barnier
Text of Michel Barnier's 18 September 2018 statement on the backstop follows. The full text can be accessed here.
HoC: The future of sanctions
This HoC library briefing considers the effect of Brexit on sanctions policy in the UK and the EU as well as the broader international outlook. The full paper can be accessed here.
HMT: Inaugural meeting of US-UK Financial Regulatory Working Group
HMT has published a short note of the meeting held in London on 12 September 2018. Topics under discussion included the outlook for financial regulatory reforms and future priorities, including possible areas for deeper regulatory cooperation and the implication of Brexit on financial stability and cross-border financial regulation, including contract continuity. The next meeting will be held in Washington DC in the first half of 2019. The note can be accessed here.
EC: Statement by Donald Tusk
Donald Tusk's "invitation letter" published ahead of an informal meeting of the Council on 19/20 September 2018 follows. Topics under discussion will include a review of the progress of Brexit. The full letter can be accessed here.
Press statements made on 17 September 2018 from Christine Lagarde and Philip Hammond on Brexit follow. The statement by Christine Lagarde can be accessed here, the statement from Philip Hammond here and the press statement here.