Margareta Pagano: If Brexit plan sells City short it may have to call hit squad

David Davis, Boris Johnson and Steve Baker are not the only ones fuming about Theresa May’s latest Brexit blueprint. Some of the City’s most senior figures, Remainers as well as Brexiteers, are spitting blood too. They cannot understand why the Prime Minister would throw them to the wolves.

They are furious that May’s “final” offer to the EU on physical goods risks giving away any leverage she might have in the crucial negotiations for a financial services deal.

Barney Reynolds, head of global financial institutions at US law firm Shearman & Sterling in London and one of the architects of the City’s plans post-Brexit, puts it best. “Is Theresa May negotiating Brexit for Britain’s biggest and most global industry, our financial services industry, by making an inter-conditional offer, or is she focusing principally on goods companies?”

It’s a fair question. You could go further, and ask whether the PM and her Dexeu civil servants get the City at all. Or have they been so captured by the threats of the big overseas manufacturers, from BMW to Airbus, that they have forgotten about the golden goose laying eggs on their doorstep?

Getting a positive arrangement on goods is vital for the UK. But negotiating the best possible agreement for the City is arguably an even greater imperative.

In 2017, the sector contributed £119 billion to the UK economy, 6.5% of total economic output. The tax take last year was a record £72 billion, and the City is the only part of the economy in surplus.

That gives the City muscle, one that should be flexed. It’s a muscle all the stronger because there is broad agreement across the City that the best deal with the EU is one which creates the highest possible access based on high-level outcomes-based recognition.

Reynolds has defined it as “binding enhanced equivalence or enhanced regulatory cooperation” between all parties, one where there is mutual recognition for mutual access.

The plan, which has been given the thumbs up by Philip Hammond, the Chancellor, is aligned with the thinking of another top lawyer, Rachel Kent of Hogan Lovells, together with the International Regulatory Statutory Group. She and Reynolds favour a new free trade agreement which sets out that it is in the mutual interest of the EU27 and the UK to keep as much as possible of the existing cross-border flows in finance to support growth across the whole of Europe.

Both sides have an economic interest in maintaining the outcomes achieved by current regulation, while UK and EU firms should be guaranteed “evergreen” access to the other’s market, locked in with a new bilateral UK-EU agreement.

But central to the proposal is for the UK and EU to negotiate a new binding treaty which would allow observance of mutually agreed international principles rather than submission to EU-prescribed rules.

This makes sense since most of the City’s regulations are based on international standards as it does so much business with the rest of the world.

Such a new treaty would allow the UK or EU to diverge if either wanted to, subject to third-party arbitration. It’s this that would stop the City being a rule-taker, a red line even the Bank of England has argued against, given its need to protect against systemic risk. Here’s the tricky bit, and the reason why the PM’s latest offer has the City seeing red. Neither France nor Germany want the UK to be given such latitude. The rest of the EU27 are said to be warm to the idea: they know they need the City’s liquidity and access to its wholesale markets.

Unsurprisingly, the French want a more narrow equivalence because they plan on stealing as much of the UK’s financial business as they can, regardless of the cost to EU27 consumers. The Germans are supporting the French so long as they can protect their carmakers, which in a properly conducted negotiation would be a point of leverage, along with French agriculture.

More details of the government’s proposals for the City are to be revealed in its White Paper to be published next week. If it doesn’t do more to support Britain’s biggest industry, stand by for the City to send in the hit squad to No 10 to help out, even more essential now Davis has gone.

With the City’s negotiating skills, the Brexit outcome would be far better for all.