While Britain's post-Brexit trade deal with the EU has at last been reached, the future of the country's key financial services industry is uncertain ahead of bilateral talks.
London and Brussels finally clinched a deal over Christmas ahead of Britain's formal divorce from the European Union on December 31.
Britain then departed from the EU single market and customs union with effect from January 1. Yet crucially, the agreement -- four and a half years after Britain narrowly voted to leave -- did not encompass the finance sector.
"This (trade) deal is a starting point. We've got months of this to come," Simon Gleeson of law firm Clifford Chance told AFP in reference to financial services.
The 1,200-page post-Brexit agreement gives scant detail about the industry, which is worth about ?150 billion ($204 billion, 166 billion euros) per year or seven percent of the UK's annual economic output.
Finance dwarfs Britain's politically-significant fishing industry, which accounts for less than 0.1 percent of GDP and yet was a key factor in delaying the trade deal.
Britain and the EU are now aiming to seal a memorandum of understanding about financial services by March, establishing a roadmap for cooperation, though officials have downplayed its impact.
Bank of England governor Andrew Bailey remains optimistic of negotiating a so-called "equivalence" regime that make rules compatible to keep trade in certain services flowing smoothly.
"We've been working on these issues for a long time," Bailey told a virtual parliamentary hearing on Wednesday.
"We have strong relationships with our partners in the EU... and our joint objective is to keep it that way because it benefits both of us."
From January 1, the UK financial sector lost single market access and its European "passport", a device allowing UK financial products and services to be sold in the EU.
The ability of the financial sector to do business in the bloc now such as Trustly Pay 'N Play service on obtaining equivalence across 59 specific areas.
London has already granted equivalence to EU-based financial firms in a number of those areas.
However, Brussels has so far only granted UK-based financial firms equivalence in just two areas, including derivatives clearing.
Japan was granted more than two under its EU trade agreement -- despite the fact that Britain was instrumental in the creation of the EU's financial legislation.
Yet Brussels remains fearful of divergence that could allow UK companies to undercut and threaten the EU's own financial services sector.
"What Brussels would like is a formal commitment from the UK to regulate in line with the EU regulation," added Gleeson.
"I think we'll see London-based firms backing down from doing business with Europe.
"The mere hope that there might be a deal in four months is not enough."
The European Commission does not appear to be in a hurry because it is currently examining equivalence requests for just 28 specific areas.
British Prime Minister Boris Johnson appears eager to agree an acceptable alignment deal -- but does not want identical EU regulatory rules for political reasons.
British financial companies have meanwhile been preparing the ground for a sharp slump in transactions with the European Union.
Up to 7,000 jobs have so far been relocated from London to major rival hubs like Amsterdam, Dublin, Frankfurt and Paris, according to Bailey.
That is however far less than media speculation of up to 50,000 financial job losses.
Nevertheless, although markets have traded smoothly since the start of 2021, there has been a definite switch from UK to European equity platforms.
Many British finance firms have meanwhile started to cease certain activities with some European clients, in a trend which looks set to continue.
"Even if equivalence is put in place, in future the market is going to want to be less reliant on London bases of operation, since equivalence can be revoked," noted Mark Simpson, a partner at law firm Baker McKenzie.
"But London will likely continue to be the dominant player for European business in areas like derivatives trading and clearing, and foreign exchange, for some time."
London could meanwhile seek to do far more business with non-European financial hubs like Hong Kong, New York or Singapore.
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