The City of London issued a stark warning about the future of European finance after Brexit — and the EU is listening

Shutterstock/Zoltan GaborThe City of London.

  • The EU’s stance on the City of London appears to be softening.
  • The UK government warned EU Brexit negotiators that an overly punitive approach to the City of London will also hurt the rest of Europe.
  • UK officials told Brussels that “thousands” of European investment funds will be under threat if the EU insists on a hardline approach to the City.
  • Fund run by UK firms are currently sold to clients in EU countries and EU firms sell their funds to UK customers under financial passporting rules.

LONDON – British Brexit negotiators have issued a stern warning to their EU counterparts over the damage that could be done if the EU takes an overly punitive approach to the City of London.

According to a report from The Times on Tuesday, UK officials told Brussels that “thousands” of European investment funds will be under threat if the EU insists on a hardline approach to the City, something favoured by the EU’s French contingent, which sees Brexit as a way to strengthen Paris as a financial centre.

UK firms currently sell thousands of investment funds to clients in EU countries, while EU firms sell their funds to UK customers under financial passporting rules. Luxembourg is a particular hub for such business.

Under the EU’s current stance, UK companies would lose the ability to sell funds into the EU. This has led British negotiators to argue that the reverse would also be true: EU firms would be unable to sell into the UK. The Times reports that the strategy was “designed to highlight the damage that could be caused if Britain fails to get a special deal for the City.”

“This was not intended as a threat. Rather, we wanted to set out what both sides could lose if we don’t get a good deal, and it was received in that spirit,” a source within the government told the newspaper.

The report comes after the EU’s hardline chief negotiator Michel Barnier appeared to soften his stance on the future relationship last week. Barnier had previously been in opposition to Prime Minister Theresa May’s “advanced equivalence” plan, as he believed it threatened the bloc’s “decision-making autonomy.”

Under the government’s proposed new relationship Britain would sign up to a system of so-called “equivalence.” The government said it will seek to improve on existing requirements for equivalence of rules between the EU and outside countries. Barnier and other officials believed that this would mean the UK would be able to control how much access it had to EU financial markets

However, after British officials clarified that this was not part of the plan and that power to grant access to those markets would remain in the hands of Brussels, Barnier is believed to have climbed down from that position, according to a Financial Times report.

“Last week we held positive discussions with the European Commission on our proposal for a pragmatic new arrangement for financial services after we leave the EU,” a Treasury spokesman cited by the Times said, adding that negotiators found “common ground in recognising both the EU’s and Britain’s desire to have control over their own decision-making.

They also recognised “the need for bilateral dialogue and cooperation to reflect the deeply integrated nature of UK and EU financial markets,” the spokesman added.

SEE ALSO:

NOW WATCH: Money & Markets videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.