By Geoffrey Smith
January 12, 2017

Britain’s financial industry has given up its efforts to keep its no-strings access to the rest of the European market, in what is a body blow to both foreign and domestic businesses trying to keep the disruption of Brexit to a minimum.

TheCityUK, the main lobby group for the financial services industry, put out a new policy paper Thursday that dropped its goal of keeping the principle of “passporting” alive after the U.K. leaves the European Union. That principle essentially allows a business that is licensed in one member state to do business with anyone and any company in the EU’s other 27 member nations. Passporting is the most important element of membership in the EU’s Single Market. But government figures have signaled they won’t fight to maintain it, and ending it throws into doubt the entire business model of banks, brokerages, exchanges, insurance companies and accountants located in the U.K.

As such, it may force U.S. banks such as JPMorgan Chase and Goldman Sachs to move large numbers of staff elsewhere, whether to somewhere still in the EU, or back to the U.S. JPMorgan’s CEO Jamie Dimon warned in October that Brexit could “create years of uncertainty,” and that his bank “will need to decide how to respond.”

But the consequences could go well beyond banks. The City of London has always been the most influential lobby on a government struggling to decide what kind of Brexit it wants, six months after the U.K. voted to leave. Without it, other key industries eager to keep Britain in the Single Market, especially the auto and food and drink industries, may find it harder to achieve their goals.

“Our position remains unchanged,” Mike Hawes, CEO of the Society of Motor Manufacturers and Traders, said in e-mailed comments to Fortune. “Being part of the single market has helped make the U.K. automotive…a critical part of the U.K. economy. Government must…secure a deal with the EU which safeguards U.K. automotive interests.”

The development comes only days after Prime Minister Theresa May warned that the U.K. couldn’t hope to “hang on to bits of its EU membership” after Brexit. That comment was widely interpreted as accepting a point made by German Chancellor Angela Merkel that the U.K. won’t be able to “cherry-pick” the best parts of EU membership while ditching all its obligations, the most contentious of which is unlimited immigration rights for EU citizens.

However, an opinion poll by ORB this week showed that Brits are more concerned about cutting immigration than about free trade. It also suggested they’re increasingly annoyed at the government for not embracing that agenda more enthusiastically.

The pound sterling slumped to a 31-year low against the dollar in the wake of May’s comments and, although it has recovered most of its losses since then, it’s now 15% below where it was before the referendum.

TheCityUK said the U.K. and EU “should conclude a bespoke agreement that delivers mutual market access, transitional arrangements to allow for enough time to implement the new relationship and access to talent…home-grown, from across the EU and from the rest of the world.”

Instead of being based on passporting, it said the relationship should be based on an that of “equivalence.” That’s a still-evolving doctrine, under which the EU allows market access to another country – notably, in the field of financial markets, the U.S. – if its standards are deemed to be “equivalent” to EU ones.

“The trouble is that equivalence exists more in theory than in practice,” says Sean Tuffy, head of regulatory issues at Brown Brothers Harriman in Dublin.

He points out that the principle won’t really be tested until new EU laws on financial markets and products (known as MIFID 2), come into force in 2018.

In theory, such an approach could work very well. At present, the rules governing the U.K.’s banks are all covered by overarching EU law, such as the Capital Requirements Directive. So there is no substantive argument for the EU to restrict their access immediately after Brexit.

But Bank of England Governor Mark Carney warned earlier this week that the U.K. couldn’t afford to “cut and paste” future changes in EU law just to keep equivalence, as this would mean giving up control of London’s financial markets and ultimately “cause risk to financial stability.”

The key word in the TheCityUK’s hopes for a new deal is “bespoke” – i.e., a deal that has no precedent, and that will therefore require a lot of negotiating. Ultimately, the new manifesto boils down to the City still wanting to hire who it wants, to sell where it wants and to have influence over any future changes to relevant laws – a combination that many in the EU would still think of as cherry-picking.

“I can’t imagine they’d be too enthusiastic about it,” says BBH’s Tuffy.

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