A Norway-style arrangement that left the UK subject to European rules it could not influence would be “highly undesirable” for financial stability, Mark Carney said on Tuesday.
The Bank of England governor said there would be risks to the financial sector if parliament voted down the prime minister’s Brexit deal and sought to break the political impasse by opting for a “Norway for now” or “Norway forever” deal, similar to the terms of European Economic Area membership.
“We would not be comfortable outsourcing supervision of this incredibly complex and important financial sector . . . one that in living memory brought the country to its knees,” he told parliament’s Treasury select committee.
Following EU rules for a limited period after Brexit carried fewer concerns, since new regulation took time to negotiate, but “the risk of being a rule-taker goes up over time”, he said. While emphasising that the BoE would respect any decision made by parliament, he said that looking purely at the issue of financial stability, losing supervisory autonomy for a considerable stretch of time would be “highly undesirable”.
“Our financial sector is about 20 times bigger than Norway’s. It is much more connected internationally,” said Jon Cunliffe, BoE deputy governor, calling the scenario “quite uncomfortable”.
Mr Carney, giving evidence on the BoE’s analysis of Brexit’s economic impact, rejected accusations that he had been helping the prime minister win support for her Brexit deal by exaggerating the effects of a disorderly exit from the EU.
The Financial Policy Committee was bound to look at a set of worst case assumptions, to ensure that banks could weather any possible turbulence — and had been discussing these scenarios for the last two years, he said. But far from employing scare tactics, the BoE had held back the details of its dire no-deal scenario for as long as possible.
“We have not volunteered this worst-case scenario; we have held it back,” he told the committee.
Even in the more benign scenarios, he warned, the threat to the City should not be underestimated — with some parts of the financial services industry at risk of losing access to EU markets entirely.
Moving from the current situation to an “equivalence” scheme in which UK and EU regulators recognise each other’s rules would already be “quite a step down”, according to Sam Woods, head of the Prudential Regulation Authority.
Even this cannot be guaranteed. “This will be negotiated access. It is not just going to happen,” Mr Carney said, noting that the political declaration accompanying the UK’s withdrawal deal allowed for “very different outcomes”.
Mr Cunliffe added that other European governments would not necessarily be swayed by the argument that all consumers would have to pay more for financial services if markets fragment.
“There is also a view in the EU that they need to have control of their own financial sector and bring as much of it as they can to the EU so it can have its own capital market,” he said.