Monica Monaco, founder of TrustEU Affairs, consults large international financial services organisations on EU regulation. (Her schedule has been ramped up tenfold since events unfolded last Friday after the UK stunned Europe and indeed the world by voting to leave the EU.)
"Europe is in shock that the UK voted for this. And is it true that the British people were Googling ‘What is the EU?’ the day after the referendum? I read it in the press, but can’t believe it," Monaco said.
She said the tone from the Commission on Tuesday had changed to a hard line since Friday’s result was announced, with Jean Claude Juncker saying there will be "no notification, no negotiation".
On Wednesday 29 June, Angela Merkel and Francois Hollande were in agreement that the UK could not have the benefits of free trade without free movement of people. An offer was suggested whereby the UK would have EEA membership with controlled migration in return for relinquished passporting rights and the power to trade and clear in euros, which the UK controversially won the right to do last year.
In effect-if this were to be agreed- it would mean London’s relocating to the EU. Shrewd move there on behalf of Francois Hollande.
The banking and payments industries rely on the passporting rule. These passporting rules may vary from one area to another after legal Brexit. For banks under the Capital Requirements Directive, for example, the Bank of England Prudential Regulation Authority may no longer be a National Competent Authority and won’t consequently be able to issue a passport that is valid; for other Directives, the Commission may need to issue a positive equivalence decision about the rules of a third country -by then the UK- before passporting is permitted.
The passporting rule in the payments industry means that where an authorised payment institution would like to provide payment services in a Member State other than its home Member State, it can do so via passporting.
Passporting rules allow services to be provided on a cross-border basis, once the relevant licence type is obtained in the home member State. If the validity for passporting of the licences obtained in the UK was to cease, organisations would likely have to setup subsidiaries in European Member States in order to operate in Europe. And as obtaining licences in some European Member States can be a cumbersome process, less creation and growth of new payment businesses is to be expected.
Furthermore, part of what makes London and the UK so attractive for the banking and payments industry is the forward-looking and pro-business innovation position of the FCA. An FS business can complete registration within few months in the UK- in other Member States the same process could take years.
As Monaco put it: "In the EU when it comes to payments regulation, we love the UK, as a lot of the pro-industry and pro-innovation negotiation has been driven by the UK. The UK has very often been the first Member State to implement European regulation, and the FCA the first authority to issue very detailed guidance. We wished on many occasions that the FCA detailed guidance could be duplicated in the other 27 countries."
"But this referendum seems to indicate that the UK does not love us," Monaco added.
Financial organisations all around want to know what’s going on in the UK. They will stall decisions. The uncertainty gives them leverage in acquisition processes in that the entity they buy may no longer have a passporting licence, for example. And then employment law comes into it as well- staff that may soon need a work permit to work in the UK may be better placed in a European member state.
To convey the extent to which the tone from the Commission had changed since Friday’s statement, on Tuesday an extraordinary session was called in the European Parliament at the last minute- and the Plenary was full. When Brussels wants to move fast, it can move fast.
"It may be an emotional reaction, which is not the best reaction but still- there was a very high turnout in the European Parliament on Tuesday and a resolution on the way forward after the UK referendum on 23 June was adopted with a large nearly two third majority.
"The resolution stresses that the United Kingdom must respect the wish of a majority of the British citizens and has to officially withdraw from the EU by directly triggering Article 50 of the Treaty on European Union. This will allow withdrawal negotiations to start as soon as possible and to prevent prolonged uncertainty for businesses and citizens alike. The tone was: You’re out, now get on with it," Monaco explained, in response to UK prime minister David Cameron’s requests to negotiate a special status.
"The European Commission noted the decline of the euro against the dollar [Monday] and the impact on European banks- it certainly does not want panic to set in and will do what it takes to make sure the problem is a UK problem; not the EU’s problem," added Monaco.
Tuesday marked the last day of financial Commissioner (Jonathan) Hill. Juncker thanked him for his service. There is consequently no UK financial services representation as of Tuesday 28 June in Brussels. And as of Wednesday 29 June, no UK representation at the Council either. The Council met on Wednesday 29 for the first time in 40 years without one of its members.
It is not panic stations yet, however this limbo period cannot go on endlessly.
As long as there is uncertainty, there will be negative impact and as long as the UK stalls to try and pull together some semblance of leadership, the more uncertainty there will be.
An option for the UK could be to be part of the EEA (European Economic Area). Norway, Iceland, and Liechtenstein, for example, have EEA membership in a similar way that the UK could.
All EU legislation applies in EEA countries – note the country is only notified of new European legislation, there is no involvement in the legislative process and the country is not ‘at the table. EU law will not apply in the EEA countries as far as the Fishery and Agriculture sectors are concerned. Being part of the EEA also means free movement of people, goods and services.
Apart from EEA membership, another option could be to implement WTO (World Trade Organisation) rules, aka bilateral trade agreements, negotiation of which can take a very long time- years for each subject between the UK and Europe.
Monaco gave as example Switzerland, a country which rejected (by referendum) to be part of the EEA and has in place bilateral agreements with the EU. Swiss regulation on financial matters, including payments, is very similar to European Regulation in many aspects.
As for Britain’s prospects in choosing this pathway and negotiating decent deals?
"Good Luck," said Monaco.