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Well, the EU 27 and the UK have been engaged in a pitched battle really for months about the terms of financial services and the future arrangements post Brexit. You get caught up in a lot of euphemistic language in this whole debate. We've had reference to something called mutual recognition, which is a model that the UK was pushing.
And we've ended up in a White Paper proposal around something called enhanced equivalence. These are all just ways of describing the type of market access that the UK wants to get into the EU post Brexit. And it's important, it's vital for the UK, because financial services in particular are so crucial to the UK economy.
And of course, the problem is that only a few days after the government navigated through domestic political resistance to come up with a white paper proposal, thought they have this great idea around enhanced equivalence, only for Michel Barnier, the EU's chief negotiator, to reject the idea out of hand.
So the city relies currently on a system of passporting, whereby it sells a whole load of its products in investment banking, asset management, insurance from London to clients around the EU 27. In order to continue to be able to do anything like that, it needs some kind of replacement system in place.
So the basis of enhanced equivalence is that you have an arrangement which ties your market access on both sides, but also gives you the ability to diverge in certain areas. If you diverge too far, you lose market access. So the enhanced equivalence model that Philip Hammond, the chancellor, came up with is based on an EU principle called equivalence, which the government would like to enhance in order to make it more solid, if you like.
The trouble with an equivalence arrangement is that it's fairly open to cancellation. There's a one month's notice provision on the whole principle of equivalence. And that's the basis though for deals that have been done in various areas of financial services with countries such as the US and Japan. Understandably, the UK wants a more solid foundation to build on. So one of the key enhancements is a longer period of notice that would be required, a year or two years.
So one of Mr Barnier's key problems with this proposal is that it distorts the whole concept of equivalence as he sees it. Equivalence is, if you like, a gift from the EU. And he probably sees it as extremely cheeky for the UK to suggest joint jurisdiction over an enhanced equivalence deal.
It's fair to say that the city was not surprised really by his rejection of the white paper proposals. This is, after all, a negotiation. Disappointed, but not surprised. I think the priority now for the city and for the government will be to go around the member states of the EU 27 and try to get them on side and bring Mr Barnier with them.
