- Brexit could lead to a “complete breakdown” between the UK and EU, a British former European Commission official said.
- Losing the financial passport may be a “game-stopper” for London’s hedge funds.
- David Wright was deputy director general for financial policy at the commission.
LONDON — The Brexit talks risk a “complete breakdown” of relations between the UK and Europe, warned one of Britain’s most senior former European Commission officials.
The strident tone ahead of the negotiations, along with the potential for so-called red lines that neither side is prepared to give ground on, could make an agreement impossible, according to the organisation’s former deputy director general for financial policy David Wright.
Britain is due to trigger Article 50, and formerly start the two-year negotiation process to leave the union, next month.
Wright spent more than 34 years at the heart European Union’s executive arm in Brussels, working with commissioners such as Leon Brittan and Michel Barnier, who is now the EU’s chief Brexit negotiator.
“Brexit was a dagger in my heart,” Wright told Business Insider. “It’s not a bit neutral, or a bit negative, but for the EU and the UK it’s potentially extremely disruptive. There’s a risk of a complete breakdown, certainly it’s looking more probable.”
He left the commission in 2010, becoming secretary general of IOSCO, the global standard-setting body for financial markets. He has since joined Flint Global, the government relations firm set up by former Foreign Office Chief Sir Simon Fraser, as a partner.
“There’s so much complexity. To resolve all of it in two years is absolutely impossible. Politics in the EU are not black and white like in the UK,” Wright said.
“There has to be less bluster on financial services,” he said. “It’s important for the UK to say we want to work and cooperate with Europe wherever possible, such as in the WTO, on the multilateral system of Basel, the FSB and IOSCO, which has made the global financial system stronger. That type of thing would make a big difference.
“Tone is important. Hectoring is to be avoided,” said Wright.
The risk for the UK is that it gets pulled into the US’s orbit, Wright said, which is pursuing a program of de-regulation and “castration” of its supervisors, with the potential to make the financial system more risky.
“Opening up trade discussions with the US — the US isn’t going to change its financial services laws for the UK, so the danger is the UK is pulled towards US rulemaking approaches and away from EU parallelism,” Wright said. “Some of the bills on the table could castrate the US regulators such as the SEC and CFTC and the Dodd Frank revisions are not clear yet.”
“Tone is important. Hectoring is to be avoided.”
UK Prime Minister Theresa May revealed her Brexit plan in a speech in January that signalled that Britain would leave the single market in return for tougher immigration controls on EU citizens.
As a result, financial firms in London could lose their ability to freely passport in to continental European clients from their UK base. The reverse is also true, with Brexit potentially leading to difficulties for EU-based firms accessing the London market.
But the real “game-stopper” for London as a financial centre could be in the fund management sector, Wright said, which relies on rules known as UCITS Delegation Procedures to allow funds domiciled in places like Ireland and Luxembourg to access London’s financial markets.
Much of the focus has been on the impact on global investment banks, with banks such as Citigroup, HSBC and JP Morgan signalling job moves to continental Europe from London.
The rules “are very important,” Wright said. “If you couldn’t do that any more, that’s a game-stopper for London. Firms will take hard-headed decisions on the basis of maintaining their business and clients – not waiting for Brexit negotiating uncertainties and haggling.”
Wright worked with Barnier in 2010 as deputy director general for financial policy.
As internal markets commissioner, Barnier was tasked with reforming Europe’s financial industry in the years following the 2008 crisis. The role often brought Barnier into conflict with banks, investment firms and government representatives, but built up his reputation as a tough and experienced negotiator.
“Once Article 50 is triggered the European institutions will watch over [Barnier] very carefully. How much room for manoeuvre he’ll have then I’m not sure.”
Barnier will be chief negotiator for the European Commission, and the opposite number to David Davis, the UK’s Brexit minister, during the talks.
Barnier “has a priceless asset from the EU perspective which is he is very well-regarded in the European Council and the European Parliament,” Wright said.
“He’s managed to keep unified Member State positions on the issues so far, which is quite an achievement and rare. He won’t approach the negotiations with a sense of vengeance, he’ll approach it as a European. He worked well with London during the repair of the financial crisis once people got to know him,” said Wright.
“So far Europe has been very unified, and he deserves a lot of credit for that, but at some point individual interests will come into play. He’s got a strong team of people. Once Article 50 is triggered the European institutions will watch over him very carefully, how much room for manoeuvre he’ll have then I’m not sure,” Wright said.
“My strong advice would be for both sides to stop talking about red lines, because a red line on one side will trigger another red line from the other and these will end up as barriers to an agreement.”