The City of London cannot continue long-term as a financial centre as it presents too great a risk to the EU’s financial system due to it lying outside of its regulatory control post-Brexit, according to EU commissioner Mairead McGuinness.
“A significant amount of risk to the EU financial system is in London and this is concerning to us as it is simply not sustainable in the long run,” McGuinness said during the 35th Isda AGM on Tuesday.
On January 1, the Brexit transition period ended, with Amsterdam surpassing London as Europe’s largest share trading centre a month later. In March, €100bn of Irish securities had shifted from London to Brussels.
McGuinness said that prior to Brexit, the EU was comfortable with the City of London being Europe’s main financial hub and “allowed” it to grow as it was within the single market.
“All of that has changed since January 1 and in the months and years to come the European Union and the United Kingdom will chart our own separate courses. We will build a stable and balanced relationship with the United Kingdom and I believe that is essential,” McGuinness said.
The UK’s Conservative government has frequently said it will no longer be “rule-takers” post-Brexit, but McGuinness warned that neither will the EU accept being beholden to the UK’s regulatory framework and the power the City of London holds over financial services in Europe.
“Of course, the European Union is entitled to diverge, and rules will also change on the EU side. But we have made it very clear from the start that there cannot be equivalence and wide divergence.
“We know that the United Kingdom does not want to be a rule-taker, and here in the European Union, we do not want to be rule-takers or indeed risk-takers,” McGuinness added.
McGuinness’ comments highlight that the EU is concerned about having a global financial hub that is strategically important to the bloc, situated outside of its control. However, there is a balance to be struck, she said.
“We will have to manage our significant level of interconnectedness with the United Kingdom strategically and we should strive for good cooperation with the United Kingdom. But we also need to avoid dependency that would translate into financial stability risks or reduce our industry autonomy.”
There were signs of progress on negotiations between the EU and the UK on a post-Brexit financial services deal, with McGuinness confirming the agreement of a memorandum of understanding in March that will begin a process of formal internal adoption.
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McGuinness said negotiations on equivalence would begin once the regulatory cooperation framework was in place but said all equivalence assessments would be made on a case-by-case basis.