The system that would allow British financial firms to access the EU’s markets after Brexit could lead to “indirect rule-taking by the UK,” a City of London lobby group has warned.

Negotiations over the post-Brexit relationship with the EU will require the UK to decide whether it will change its regulatory regime before or after it asks the bloc for so-called “equivalence”, the International Regulatory Strategy Group (IRSG) argued in its latest report.

“While seemingly technocratic exercises, decisions concerning equivalence can be politicised or otherwise linked to extraneous factors,” the IRSG’s report, to be published on Thursday, reads. “Maintaining equivalence with the EU in certain areas could lead to a form of indirect rule-taking by the UK”.

The calls follow a warning to business from the chancellor, Sajid Javid, last week. Mr Javid told the Financial Times that there would generally be no alignment with EU rules.

But the picture for financial services is more nuanced. Mr Javid said the government still favours “outcomes-based equivalence”, whereby equivalence could be granted if the overall direction of travel is the same, even if particular rules differ; something the lobby group also wants.

It is far from clear that the EU will agree to this: it has insisted that it will not create a bespoke arrangement for the UK not offered to other countries.

The principle is also similar to “mutual recognition”, an idea previously pushed by the IRSG — chaired by the former City minister, Mark Hoban. This involved a looser arrangement giving the UK and the EU mutual market access and free rein to devise their own rules, as long as the outcomes of those regulations were deemed broadly similar.

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This was abandoned by the government during negotiations when it became clear the EU saw it as part of the UK’s efforts to diverge from the single market’s regulations while still retaining access.

IRSG is also pushing for greater scrutiny of UK regulators after vast amounts of EU rules have been “onshored” into British legislation. EU machinery provides for greater oversight and scrutiny of UK regulators, which will be lost after Brexit.

Thursday’s report argues for a parliamentary committee dedicated to scrutinising financial regulation and watchdogs, rather than relying on the Treasury select committee, which has a much broader remit.

IRSG is also the latest lobby group to call on the government to give the regulators a statutory objective for competitiveness. This is controversial because the former City watchdog, the Financial Services Authority, had such a mandate but was thought to be too much of a cheerleader for the City.



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