McFarlane also brushed off fears expressed by some bankers and politicians that a blueprint for Britain’s future trading relationship with the EU, proposed by Prime Minister Theresa May, would cripple job creation and trigger London’s decline as a global financial services centre.

Mc Farlane stated: “I don’t think in the long run that there will be terminal damage [to London],”in an interview in his capacity as chair of lobby group TheCityUK.

In the short term, Brexit is set to cost Britain up to 12,000 financial services jobs, according to the city of London’s financial district leader Catherine McGuiness. Many more jobs are also expected to dissapear in the long term.

However, McFarlane remained firm that London would remain Europe’s primary hub for financial services, due to the city having the continent’s deepest markets and broadest pool of talent– countering  doomsayers who claim that the sector could end up the biggest loser from the end of unfettered access to EU markets.

The financial sector accounts for 12 % of Britain’s economic output, but McFarlane assured that the government’s dismissal of the sector’s preferred plans for access to the EU single market post-Brexit will not be as destructive as some commentators have predicted.

Brexit supporters have remained strong on their stance that  there may be some short-term pain for Britain’s $2.9 trn economy– but that long term it will prosper when cut free from the EU.

However, according to McFarlane –A sharp spike in Italy’s cost of borrowing in late May acts as a sobering reminder to EU stakeholders that it needs London’s markets as much as London needs the EU.

Many had pinned hopes on a bid for “mutual recognition” – whereby Britain and the EU would accept each other’s rules in exchange for broad two-way market access – as the best way to protect financial contracts and activity worth trns of euros once Britain exits the EU on March 29.

Prime Minister May has instead chosen to build trading ties on a legal mechanism called “equivalence”, whereby the EU deems a country’s rules to be as robust as its own.

McFarlane said that the government now needed to act fast to negotiate “expanded equivalence” for Britain after critics said the regime exposed firms to sudden loss of EU market access.

“You need to get on with it. Aggressively. Because radical change in this space is difficult,” he stated.

The EU has so far opposed any attempts to modify equivalence so far and has stated that it has no further plans to either.

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EU ‘equivalence’ offers UK banks a narrow back door to Brexit

June 21, 2016: British politicians urging voters to keep the UK in the European Union warn that exiting would endanger London’s financial centre by stripping firms of their ‘passport’ to do business across the bloc. Leave campaigners counter that the country’s almost identical rulebook would keep the doors open. But Europe’s constantly changing legislation, and the complications of gaining recognition, raise doubts about the ‘equivalence’ alternative.

To hear pro-EU campaigners tell it, the very existence of London’s financial center would be at risk if UK voters opt to leave the European Union in a referendum on June 23.

Voting out of the bloc would cost British financial companies their ‘passport’ to do business in the ‘single market’ that lets firms operate in 30 countries — the other 27 EU nations plus Iceland, Liechtenstein and Norway — without needing local approval.

No one exploits this membership perk as widely as Britain’s financial industry does. Its firms account for three-quarters of passports used in 2015, according to the think tank New Financial, citing data from EU regulators.

Aided by region wide access, finance ranks as the country’s biggest export sector, generating a £72 billion ($102 billion) trade surplus in 2014, according to industry body TheCityUK.

London financiers trade with the whole world, of course. But Britain’s link to Europe is at least part of the attraction for global businesses that could move as easily to New York, Hong Kong or elsewhere.

A British exit from the union would imperil all that, says the Remain campaign and what appears to be a majority of the financial industry.

Alternative visa

But the Leave camp holds out an alternative track for firms that lose their passports in case of Brexit: Non-EU countries can show that their rules are ‘equivalent’ to the bloc’s and can open doors for their financial companies.

Most EU financial laws contain a clause that grants market access for outside countries with rules and enforcement at least as rigorous as Europe’s.

The European Commission makes those determinations for each law, judging one country at a time. EU regulatory agencies for banking, securities and insurance provide analysis for those decisions, but the call is made in Brussels.

The UK’s equivalence to the current rulebook is beyond question. Bank and insurer capital standards, conflict-of-interest protections for asset managers and securities dealers — Britain’s ‘gold-plated’ rules tend to exceed, not just meet the demands of the Europe’s ‘single rulebook’.

A willing commission — if not sulking over a Brexit — should declare those areas as equivalent with no fuss.

Moving goalposts

The UK would still have to draft some statutes to replace the portion of EU demands that are set in directly binding regulations, rather than national law. Having helped craft many of those measures, the UK could adopt those with relative ease.

Yet the EU rarely leaves its goalposts in place. With pre-programmed reviews wired into most laws, Brussels would keep the UK on the treadmill of matching it, measure for measure, as in the case of Iceland, Liechtenstein and Norway.

Britain would still have the option of skipping some provisions considered too objectionable. The EU cap on banker bonuses — as one of the few financial measures on which the UK was outvoted — would be a tempting target, but risky for ‘equivalence’ seeking banks, as it’s embedded in the main law on capital standards.

The law on alternative investment fund managers — hedge funds and buyout firms — could be another. Although the UK had some similar rules on the industry, fund managers objected to the EU’s mandated scrutiny of their leverage. There’s less to lose for Britain there, as the law doesn’t offer the same free access based on equivalence.

Vexing cases

European laws with equivalence regimes demand only a comparable outcome, not identical texts. Outside countries can frame their measures however they like, provided they show some teeth in the enforcement.

In practice though, equivalence reviews have proved surprisingly vexing in some cases. Rules for auditors provide one example.

The commission and US regulators agreed on an approach before drafting rules, yet the American rules still languished in a critical procedure, until top officials cut a deal for the sake of preserving close ties. Jonathan Hill, the UK’s appointee to the commission, where he holds the financial services portfolio, sought to play down the prospects of the equivalence option, in arguing for the Remain camp.

In a hearing at the European Parliament, UK Independence Party member Steven Woolfe challenged Hill to explain why the commission would deny recognition to Britain. “Are you suggesting the equivalence rules would be changed to damage the City of London,” Woolfe asked.

Hill replied that even where the EU is willing, small differences can hold up such findings — for almost four years, in the case of US rules for derivatives clearinghouses.

The equivalence track holds out a chance for British financial firms to gain a visa to visit the EU, but it could prove no replacement for a passport to live there.

Lewis Crofts is Chief Correspondent at Mlex

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