Theresa May’s speech on Brexit covered many of the topics that were central to the Brexit referendum debate. Immigration, the European Court of Justice, and Parliamentary sovereignty all had starring roles. But, for once, serious comments were made on a topic that has so far been subject to little comment from government – the future of the UK’s financial services industry. Whilst trade associations, firms, and advisors sometimes appear to have commented on little else since the referendum, the government has largely remained silent. Until now.

Theresa May’s speech made three important references to the future of the financial services industry, and they are largely what the industry had been hoping to hear.

Reciprocal Access

After talking about seeking the greatest possible access through new free trade arrangements, the Prime Minster noted that these arrangements might not be entirely new. In certain existing sectors, such as financial services, she said that it made “no sense to start again” when we have had “the same rules for years”. (She made similar comments about the automotive industry, but these were the only two industries mentioned.) In return for reciprocal access, and potentially the making of “reasonable contributions” to the costs of maintaining common arrangements, the UK might be prepared to make a special deal for financial services. So when the Prime Minster said that she did not want a “half in, half out” solution, she did not mean entirely out either.

Several points arise from these comments. It is not clear whether she means reciprocal access where such arrangements already exist, or reciprocal access across the board for financial services. Existing EU equivalence measures are limited – both in scope and usefulness, because they are political gifts that can be withdrawn. However, presumably, the reference to making “reasonable contributions” to the costs suggests a broader arrangement than this, as there is no suggestion in (for example) MiFID that a third country that reaches equivalent status would have to make any payments into the EU. A further conclusion that could be drawn from the suggestion that “reasonable contributions” to the EU’s costs in order to obtain that access is that it will be on the basis that the UK is part of the rule making infrastructure, as presumably this is where the costs would come from. So perhaps this would mean a seat at the table (observer status? Full decision making?) at the ESAs. However, let us hope that mentioning both financial services and automotive sectors at the same time is not an implicit hint that there might have to be a trade-off between the two of them.

Transitional Period

When discussing the “phased process” by which we would move from exiting the EU to leaving it, Theresa May made specific reference to the “legal and regulatory processes for financial services”. In other words, this is a sector, in particular, where a considerable time period might be needed to adapt to the new environment, when the UK might be prepared to retain a form of membership, and pay contributions to do so, to continue to benefit from existing passporting arrangements. Whilst we have to assume that Theresa May’s approach is that passports will be lost in the end (as retaining passports would be a “half in, half out” arrangement), the industry may get the transitional period that it has been seeking. One interesting political point arises in this regard though. On the assumption that the UK leaves the EU in March 2019, a general election will be due 14 months later. Transitional arrangements of any type that are still in operation in May 2020 would give rise to the political difficulty that the UK had not properly withdrawn from the EU, and that Theresa May had left voters with a “half in, half out” arrangement. This may be surmountable, but it did seem clear that Theresa May did not have in mind an extended transitional process, which would, in her words, amount to “permanent political purgatory”.

Access to the City

Theresa May ended on a combative note, by saying that no deal would be better than a bad deal. In this section, she specifically spoke of the prospect of European firms losing access to the City. The fact that a bad Brexit would have an impact on companies in the EU seems to have gained traction over recent weeks. Theresa May’s statement that without a “good” deal European firms would lose access to the City, is, however, difficult to reconcile with the existing legal position. The UK has an unusually liberal approach to incoming financial services business, whether it is from the EU or elsewhere. The geographical scope of regulation in the UK is limited – it tends to regulate actors that are based in the UK, rather than people who deal with UK-based clients. And the overseas person exclusion is a helpful safety net. So quite how European corporates could lose access to the City, when it is so straightforward for American, Swiss, Japanese or Peruvian corporates to do so, is difficult to see. Let us hope that this is an attempt to illustrate that the UK does have cards to play, rather than a serious suggestion that the UK might either change its approach or be prepared to discriminate against firms from the EU.

Next Steps

Now that the financial services industry knows that it is on the government’s radar, the focus is likely to shift to considering the best tactics for achieving Theresa May’s strategic outcomes. It appears that a new, comprehensive arrangement focusing on mutual access across the financial services industry based upon the UK’s equivalent rules could form a central plank of this approach. No deal of this type has ever been done before – but then, no country has ever left the EU before, let alone one which is the regional international financial services centre. This suggests that the answer is not to be found in the detail of existing legislation, such as the MiFID third country equivalence measures, but a broader package of deeper reforms aimed at maintaining the existing level of access in a mutually advantageous way. This is a bold approach, but it is important that early progress is made on transitional provisions so that jobs do not leave the City because of the uncertainty that will otherwise result.