As Brexit inches closer by the day, the UK has yet to finalize the terms of its divorce from the EU. British politicians are now scurrying to mitigate the impending crisis. Meanwhile, a civil war has erupted among the Tories, pitting hardliners such as Boris Johnson and Jacob Rees-Mogg against those who advocate for a softer landing. The battle has morphed into a grand chess play of politics, mired by uncertainty and distrust on both sides of the aisle.
An alternative solution proposed by some lawmakers is to mimic the Norwegian model. Among them is MP Nick Boles, who recently called on Theresa May to halt the transition talks in favor of membership in the EEA.
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Financial sector braces for impact
One sector of the British economy stands out as being particularly vulnerable. London has long carried the lantern as Europe’s capital of finance. In 2016 alone, it employed nearly 360 000 workers, spread out over a plethora of sub-sectors.
A hard break with the EU could spell disaster for the industry, with access being cut off to the continental market. As a consequence, hundreds of thousands of jobs could end up being exported to cities such as Frankfurt and Zurich. Now insiders are asking themselves whether the Norwegian model is the best course of action.
The EEA’s core provision grants its members free entry to Europe’s single trade market. That includes the export of both goods and intangible services to the continent. Inversely, European firms are granted access to Norway’s domestic market, with some areas of the economy being exempt.
Cross border economic activity has in turn led to some judicial quandaries, such as questions about national versus supranational authority. Ironically, the financial sector serves as a prime example of this conflict.
One core issue relates to the so called CRR and CRD IV directives. It dictates the capital reserve requirements of EU banks, as a means to prevent insolvency. Norwegian banks’ ability to compete is partly impaired due to more stringent capital requirements at home. It allows foreign banks to reinvest a larger portion of their profits, while serving as a financial straitjacket on domestic firms.
The consumer loan and microfinancing industry has also witnessed some discontent among its member ranks. Norwegian banks are bound by a national regulatory framework, in which they must obtain a license to operate; a process known to be both arduous and expensive. Yet, other banks can circumvent these rules by gaining a license in another EEA member state.
The lack of common regulations could spell problems for the financial industry, if Britain decided to follow its neighbour’s lead.
Framework of the EEA
EEA is an acronym for the “European Economic Area”. It first went into force in 1994, with its original membership block consisting of 17 states. Since then the numbers have been pared down, as the European Union swelled in size.
Today it includes Norway, Liechtenstein and Iceland. Switzerland has chosen a different approach, through the formation of bilateral agreements with other states. EEA members are subject to the majority of EU laws and regulations, albeit not all of them. They have also been granted a free pass to implement trade protections for their agricultural, energy and maritime sectors.
If Britain decides to follow this path, if would represent a “soft landing” in the eyes of some constituents. Yet, it would shield most of its domestic economy from a financial blowout.
National regulations are a risk factor
Norway has vast powers to regulate its own industries, including the financial sector. Unlike traditional EU members, they have the right to veto regulations and affix special caps on sectors of the economy. It includes the credit card industry, which has recently been put under greater regulatory pressure.
Lately, a new proposal has gained steam among the members of Norway’s parliament, the Storting. It entails a curb, or possibly an outright ban on certain types of marketing. In this case it applies to the marketing of bonus points, rebates, cashback and other types of credit card advantages.
Although Britain has a history of being more tempered when it comes to regulating its financial industry, this could turn into a dillemma. As a full fledged EU member, financial companies within the UK was bound to a common regulatory framework, which prevented politicians from passing laws on impulse. As an EEA member there is a higher probability of new laws being imposed on the industry, which in turn could render it as less competitive.