Spring is in the air! The EU ratified the breakthrough transition agreement between Britain and the EU on 19 March that will lead to an “orderly withdrawal”. One can almost feel the collective sigh of relief across Europe, British businesses and Westminster including the prime minister, Theresa May, whose hand has been strengthened. Britain isn’t out of the woods yet, but in Churchillian tones “it is perhaps the end of the beginning.” We now need “regulators to be tasked to work together to underpin this political commitment and give firms the certainty they need”, commented the City of London Corporation, which welcomed the deal – a sentiment echoed by a range of city and business organisations.
Britain is now free to make, but not trigger, trade deals during the Brexit transition period, which will run until 31 December 2020, while remaining part of the single market and customs union. The UK will be bound by EU rules but will not have a say on any decision-making. The country can now show the rest of the world that it is open for business and crack on forging trade deals with other countries.
Britain has reached agreement crucially on EU citizens living abroad (the status of 4.5mn Europeans living in Britain, as well as Britons living in the EU, is secured) and the divorce bill (in excess of £37bn). But not the Irish border.
This question has been parked for now. Britain wants a frictionless border between Northern Ireland and the Republic of Ireland. The EU has a “backstop” remedy which would mean Northern Ireland could remain inside the EU’s customs union if no alternative solution is found. It behoves the UK now to come up with a better proposal, but this is tricky and unchartered territory!
Financial Services and the EU
Specific provision has been made for financial services too in the Brexit transition agreement. This is set out in an Annex to the agreement based on enhanced “equivalent” rules. The tone is positive, but the agreement stops short of allowing financial institutions a “passport”, or the preferred “mutual recognition”, of different EU regulatory systems. Plus, equivalence will involve lengthy technical assessments and final approval by member states. But, it is a tried and tested mechanism, having been used by other countries such as the US for audit services and derivatives trading.
This is a good outcome for Britain and Europe and for financial stability. UK-located banks underwrite around half the debt and equity issued by EU companies and provide more than £1 trillion of cross-border loans via annual lending to the EU.
Economic indicators seem to be validating the Chancellor’s recent upbeat Spring Statement. The current bank rate is 0.5% and the Monetary Policy Committee may consider raising to hold inflationary pressures in check.
Overall, confidence from the Brexit transition agreement is expected to have a positive impact on the economy. The negative impact from Brexit on Sterling has now worked its way through the system and inflation is falling – the Consumer Price Index eased to 2.7% in February down from 3% in January. The Office for Budgetary Responsibility (OBR) says inflation will fall to 2% by the end of the year and has also revised its growth forecast for 2018, up to 1.5% from 1.4% previously. ONS growth statistics are out on 29 March.
It’s also the start of the new tax year on 6 April. The income tax personal allowance increases to £11,850 and the higher tax threshold to £46,350 with further promised tax allowance increases in the pipeline.
Overall, there is cause for cautious national economic optimism.
Pensions watchdog powers
The Department for Work and Pensions (DWP) recently published proposals to give The Pensions Regulator powers to punish company directors who deliberately put their company’s pension scheme at risk through punitive fines. The DWP will also introduce legislation making it a criminal offence to commit “wilful or grossly reckless” behaviour in relation to a pension scheme. The government is looking to avoid the potential impact of another BHS or Carillion-style collapse on company pension deficits.
A boost to work-based pensions will also come from further mandated increases in automatic enrolment contributions from 6 April, when the total minimum contribution increases from 2% to 5%, with employers contributing 2% and employees 3%.
The city remains robust and vibrant on the world stage. Reinforcing this positive and rightly earned reputation is the FinTech sector, where incidentally the FCA recently announced a new global regulatory sandbox to incubate promising FinTech firms. Sector growth of some 88 per cent is predicted over the next three years according to a global FinTech survey by the London Stock Exchange Group and TheCityUK.