A quickie divorce, step three: the financial settlement

We now reach the final element in a quickie divorce: the financial settlement.

A one-off payment, probably in the single billions, will be necessary to cover items such as the UK’s share of EU pension and other future obligations, balanced by its share of buildings and other tangible assets.

Any periodical payment would be to cater for specific programmes that the UK found valuable, such as the Erasmus scheme of student exchanges. This might be a periodic payment in the hundreds of millions.

Some people suggest that the UK might be bulldozed into periodical payments for passporting financial services. City sources claim that as much as 20% of tax receipts from the City (£13.3bn) might be at risk from the loss of passporting or other disruptions. But sums like these are hard to credit, for at least half a dozen reasons:

* International banks do pay around 20% of total taxes sourced from the City, but only a fraction of their activities benefit from passporting into Europe. Passporting is intended to protect consumers, whereas City institutions largely deal with each other or leading commercial or industrial corporations.

* Also, international banks are but one of the City’s activities: others include the UK-based banks providing consumer, industrial and mortgage lending; as well as non-banking activities, including asset managers, currency dealers, hedge funds, life and general insurance and private equity; together with professional services including actuaries, fintech, law and risk-management. Almost none of this is vulnerable to the loss of passporting.

* If, moreover, the international banks concerned are European, they benefit from passporting into the UK, reversing the balance of arguments on the topic.

* Most UK collective investment vehicles operate via the Channel Islands, Dublin or Luxembourg, rather than using their passport from London. This tells us that a low-tax regime means more to them than any gains from passporting. Once again, this opens the way for the UK to revisit its tax regime to make the balance more attractive.

* Since passports were introduced, the growth of UK financial exports to the EU has barely improved. Meanwhile, UK financial exporters sell without passports to their two largest markets, Switzerland and the US.

* Finally, City institutions will adjust. They will find new sources of revenues, to serve as the wherewithal for future tax receipts under whatever regime then applies.

No one knows what the right figure for the sums at risk might be, but no reasonable estimate of them amounts to a good reason to pay into Brussels.

Try a thought experiment: imagine what the EU would charge the UK for full participation in the pertinent aspects of EU decision-making on financial services (one of the main concerns of City Remain voters). To make such participation worthwhile, it would have to include a UK veto on regulations affecting the City, with dispute resolution under the binding arbitration described above. Plainly, this is a pipe dream, which only reminds us of the limits to what a financial settlement can achieve.


The thrust of these three blogs has been that it is unrealistic to expect too much from prolonged (let alone detailed) negotiations. The EU-Canada trade deal debacle tells us that Brussels will find it close to impossible to develop a position which satisfies all its members. Its negotiators will be discouraged from offering any kind of flexibility to the UK, for fear that concessions are demanded elsewhere. Most of all, the EU has so much else on its plate that it would be delighted to do without the distraction of Article 50 negotiations carrying on till the second quarter of 2019.

The UK has no reason to make things unnecessarily tough for our neighbours. A quickie divorce eases the position for them and cultivates desirable conditions for us: reducing uncertainty at home and overseas, making the best of the EU’s own market and accelerating new departures in international trade.