EU engaged in ‘very serious escalation’ over UK financial services, says Bank of England governor

Andrew Bailey tells Treasury Select Committee the EU seems to want to take derivatives clearing out of London and says it’s ‘something we would have to resist very firmly’

The Bank of England governor, Andrew Bailey, has accused the European Union of trying to poach business from the City of London in the wake of Brexit, labelling the bloc’s recent activity a “very serious escalation”.

Mr Bailey told the Treasury Select Committee on Wednesday the EU now seems more interested in taking euro-denominated derivatives clearing business out of London and into the EU than making sure the UK’s regulations are “equivalent” to the bloc’s for financial stability reasons.

“That seems to be where the debate is heading,” he told MPs.

“I’m not surprised by that. Brexit has been the stimulus to revise this debate.”

The governor said it looked like the EU was preparing to exert regulatory pressure on EU financial firms to shift their activity out of London and into the EU.

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A document from a European Commission working group was reported by Reuters this week to show Europe’s largest banks are being asked justify why they should not clear derivatives in the EU.

“Frankly, it would be a serious escalation of the issue,” said Mr Bailey, and suggested such pressure would be of “dubious legality”.

“I have to say to you that would be highly controversial – and that would be something that we would have to, and want to, resist very firmly.”

Mr Bailey did not specify what form that resistance would take, saying it would be for ministers to decide.

“I’m not going to obviously say how the government would react to that because that’s for the government to think about and we will work very closely with them on this but it would be a very serious escalation in my view of the issue,” he said.

The EU granted the UK regulation temporary equivalence in September for derivatives clearing, enabling the activity to continue to take place in the City of London after the end of the Brexit transition on 31 December.

The UK had hoped to obtain full equivalence from Brussels for clearing and also other financial activities and is in talks with Brussels to produce a post-Brexit memorandum of understanding on financial services, due next month.

But Mr Bailey said that the recent attitude of the EU suggested that equivalence was a “sideshow” and that the EU’s real agenda seemed to be a “location policy” of shepherding as much lucrative financial services activity out of London and into the bloc as possible.

In his Mansion House speech earlier this month Mr Bailey warned that the EU seemed to be trying to “cut off” the UK on financial services, which he said would be a “mistake”.

The temporary equivalence for UK derivatives clearing by the EU expires in the middle of 2022.

The UK was not granted equivalence by the EU for EU share trading. That has already resulted in billions of euros trading activity shifting out of London into mainland Europe this year.