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The City of London’s lucrative position as a financial hub for euro trading will be at stake in Brexit talks but it is “too early to draw conclusions” about the business moving from London, Europe’s new financial services chief has said.
The City’s status as the main centre for euro-denominated clearing has long rankled eurozone capitals. Only days after Britain’s shock referendum vote, François Hollande, France’s president, said that the arrangement had to end, adding that it would be a “lesson” to those who advocated the UK’s EU exit.
In an interview with the FT, Valdis Dombrovskis, who took over the EU commission’s financial regulation brief on July 15, took a softer line: there are “different factors at play” in deciding what to do, he said, “but certainly it’s going to be part of our negotiations with the UK . . . obviously this is a relevant question.”
Mr Dombrovskis, Latvia’s former prime minister and the European Commission vice-president for the euro, embodies the shift in Brussels politics since the Brexit vote. His new responsibilities for financial regulation came through the resignation of Jonathan Hill, Britain’s commissioner, in the aftermath of the Leave campaign’s victory.
Lord Hill, an ally of former prime minister David Cameron, had held the commission’s coveted financial regulation brief since 2014, overseeing Europe’s banking union and the capital markets union initiative, which aimed to broaden businesses’ funding opportunities beyond traditional bank loans.
Mr Dombrovskis told the FT that he would pursue “continuity” with Lord Hill’s agenda. “With the possibility of the EU’s biggest capital market actually leaving the EU, this task becomes even more urgent and even more relevant,” he said.
He also sought to allay fears that, after the Brexit vote, eurozone priorities would dominate financial services regulation, overriding the interests of non-euro countries in the single market. “To the extent possible we should be moving forward as an EU as a whole,” he said, in a nod to countries outside the euro area. Others senior officials in the Commission take a less accommodating view.
As for the fate of the City itself, Mr Dombrovskis warned there was no simple solution for preserving the prized ability of London-based traders and investors to operate freely across the whole EU market after Brexit.
Should Britain leave the single market, as some British ministers have suggested, Mr Dombrovskis noted it would leave the City reliant on a separate set of provisions in EU law that grant overseas-based firms some rights to operate in Europe.
This would require Britain to apply for access “sector by sector,” he said, with the EU to vet whether the UK’s regulatory standards are as tough as its own. In such a scenario, Britain’s application of the current EU rule book would help, he said. “But certainly it is a more complicated and less straightforward solution.”
Mr Dombrovskis inherited a full in-tray from Lord Hill, who was preparing a wave of legal proposals for the second half of this year. These include rules to help the EU cope with major bank failures, and also highly sensitive plans to harmonise some elements of national insolvency law.
While it is early days, one area where Mr Dombrovskis has already taken a slightly different tack to Lord Hill is on a controversial plan to set common EU rules for the structure of banks, including potentially breaking them up.
The Latvian is the second EU commissioner to inherit the problem of what to do about the proposal, which has been stuck in the European Parliament for two years. It is particularly loathed in France, whose banks stand to be most affected by the law.
Rather than park the issue, Mr Dombrovskis said he wanted to see if something could be salvaged. There are many examples of bank structure rules that have proved their worth, he said. Separating retail from investment banking “has proved useful in a certain number of cases and not only in the EU.”
Mr Dombrovskis’ arrival has sparked concern among bank lobbyists who backed a far-reaching Lord Hill plan to review some financial regulations, notably capital rules, and weed out “unintended consequences”.
Mr Dombrovskis said his goal was to keep prudential rules just as tough as before, while ensuring any new measures taken are growth friendly. “No one is talking about scaling rules back,” he said.