UK set to push London's favoured Brexit strategy

London is expected to signal in the next few weeks that it wants a mutual recognition system to regulate financial services after Brexit.

Britain's government is ready to push for the kind of Brexit plan for financial services that the City of London has long favoured, but which has already run into opposition in Brussels, two government officials said on Friday.
London is expected to signal in the next few weeks that it wants a mutual recognition system to regulate financial services after Brexit, in the hope of preventing a hit to the City of London's access to the bloc, they said.
"It is obviously in everyone's interest to not just totally turn on its head the pan-European banking system," one of the officials said. "Everyone has a lot to lose from this if we can't get a deal."
Bank of England Governor Mark Carney has previously said Britain and the EU should adopt a system of mutual recognition or run the risk of a hit to financial services across Europe. With little more than a year to go before Brexit, many banks have begun activating contingency plans to move some operations out of the country.
Frustrated that there was little sign of how Britain's government intended to protect the industry, London bankers came up with their own plan to the keep the single market open by Britain pledging to honour global standards.
But Brussels has rejected that industry proposal, meaning London's bankers may have to rely instead on what is known as the equivalence system for regulation.
That legal mechanism allows countries from outside the EU to access the single market in limited circumstances. Access is patchy and can be revoked at short notice.
The government officials said that the mutual recognition plan was still favoured by London because it would retain access for firms based in Britain to the EU's single market while allowing some flexibility from EU rules. The announcement could also ease the concerns in the finance industry that the government does not have a plan for the sector, the officials said.
One of the government officials said there were reasons to believe that Britain's favoured outcome was possible. "The EU has never struck a deal with someone before where it has already had the exact same regulatory equivalence," the official said.
"Secondly the commercial imperatives are 180 degrees different from a normal trade agreement. Normally we start from a status quo and say 'wouldn't it be great if we could get closer'." The Financial Times newspaper reported the government's plan to endorse the mutual recognition plan earlier on Friday.
A spokeswoman for the finance ministry declined to comment on the reports which she said were speculation.
A final decision on the best model to pursue has not yet been taken, the government officials said.
Britain's vast financial services sector looks set to be one of the most divisive areas in the Brexit negotiations. Britain wants a generous deal while the EU insists that Britain's red lines - such as ending the free movement of workers from the EU - make that impossible.
Britain is home to the world's largest number of banks and hosts the largest commercial insurance market. About 6 trillion euros ($7.5 trillion), or 37 per cent, of Europe's financial assets are managed in the UK capital, almost twice the amount of its nearest rival, Paris.
 
Retail sales slim down on New Year diets
Meanwhile, British shoppers' New Year resolutions to get fit proved less healthy for retailers last month, as sales rose much less than expected and a longer-term backdrop of rising prices and lacklustre wages also weighed on growth.
Even by the standards of a normal January, demand for gym wear and sporting goods was unusually high - but this was not enough to offset a chunky fall in the volume of food purchases, the Office for National Statistics said on Friday.
Overall, retail sales volumes rose 0.1 per cent on the month, well below forecasts in a Reuters poll for a monthly rise of 0.5 per cent, after dropping 1.4 per cent in December. In year-on-year terms, sales grew by 1.6 per cent - the fastest since August, but still right at the bottom end of economists' range of forecasts.
"Analysts will no doubt be digesting these figures to determine if this was a reflection of households setting about 2018 with the aim of shedding some pounds, or... merely symptomatic of the extent of the broader household cash squeeze underway," Investec economist Victoria Clarke said.
Britain's economy underperformed its rivals last year as higher inflation - caused by the fall in the pound since June 2016's Brexit vote - hurt spending power, though forecasts for a severe downturn proved too pessimistic.
The Bank of England expects the consumer squeeze to ease in 2018 as inflation cools from near six-year highs and wage growth ticks higher, although surveys of British households suggest sentiment remains subdued.
Andrew Sentance, a senior economic adviser to accountants PwC and former BoE rate-setter, said it would take until the second half of the year at the earliest until consumers felt the benefit of lower inflation.