Freed from British influence, European authorities are hatching an offensive to weaken the Brexit-addled City of London.
Officials in Berlin, Brussels and Paris are looking to amend the post-crisis financial rulebook known as MiFID II by walking away from concessions they made to the U.K. in the six years it took to complete the regulations.
Policies governing research spending, record keeping and trading in stocks, derivatives and commodities are likely to be revised and could make Brexit tougher to negotiate for international banks such as Goldman Sachs Group and J.P. Morgan Chase. Changes would also be aimed at bolstering Deutsche Boerse's dominance against the London Stock Exchange Group in futures and other listed derivatives.
"The fact that the biggest financial market in Europe is now outside the EU will change the equation for financial-service regulation in general," said Markus Ferber, a German member of the European Parliament who was the lead lawmaker on the rules, formally called the revised Markets in Financial Instruments Directive. It would be "naive" to think otherwise, he said in an email.
The EU is expected to seek initial feedback from banks and other firms within days, according to people with knowledge of the matter. A formal proposal is slated for the third quarter.
At stake is more than specific policies but the entire architecture enabling London's finance industry to maintain anything close to business-as-usual. After Brexit, London financial services firms' access to the EU will depend on a process known as equivalence — under which Britain would have to prove to Brussels that its rules are at least as stringent as the bloc's. The equivalence system that will govern finance gives the EU unilateral power to decide if British rules are tough enough to create a level playing field.
"Combining the MiFID review with equivalence allows them the possibility to move the goalposts for equivalence, which could very well give the EU more leverage," said Nathaniel Lalone, partner at Katten law firm in London who works on cross-border regulatory issues in the derivatives market. "There is a risk that the MiFID review could be misused for political ends, which could ultimately, and regrettably, serve to frustrate access to EU markets by City firms."
The U.K. left the 27-nation bloc on Jan. 31, with the deadline to complete a trade deal at the end of 2020. Initial sparring between British Prime Minister Boris Johnson and EU negotiator Michel Barnier points to a struggle to avoid a cliff-edge.
The pound reversed gains after this Bloomberg report fanned worries over the trade tensions. Sterling weakened 0.3% to $1.2997 at 4:40 p.m. in London.