On January 17, UK Prime Minister Theresa May laid out the UK government’s negotiating principles for the United Kingdom’s departure from the European Union, which heralds a new, more substantive phase of the Brexit process.

The Prime Minister’s theme for the speech was the creation of a “stronger, fairer and global Britain” alongside a “new partnership” with the UK’s EU allies. The balance of the speech was devoted to describing May’s 12 key priorities in the upcoming negotiations, several of which are directly relevant for the financial markets. May also announced that both the House of Commons and the House of Lords will be given the opportunity to vote on the final deal with the European Union.

Of particular note for the financial markets, May stated that the UK government’s economic priorities are twofold: (1) departure from the EU single market, to be replaced by a “bold and ambitious” free trade deal that would provide the “freest possible” trade in goods and services with the European Union; and (2) near-total departure from the EU customs union, to provide the United Kingdom with the ability to enter free trade agreements with other countries, including the United States, which would not be possible within the EU customs union (which negotiates as a bloc with third countries). However, the Prime Minister did suggest her preference for the United Kingdom to maintain tariff-free access to the European Union via another form of association to the EU customs union. The speech also confirmed the UK government’s intention to end the jurisdiction of the European Court of Justice in the United Kingdom and to ensure that EU law and regulation that has accrued over time—referred to as the acquis communautaire—will be incorporated into UK domestic law prior to the United Kingdom’s departure from the European Union.

In order to avoid any instability during the period immediately following Brexit, the Prime Minister proposed a “phased implementation” to the “new partnership” between the United Kingdom and the European Union, while expressly stating that an “unlimited transition” would not be acceptable. May noted that the specific phases and timing could proceed at variable speeds depending on the specific sector/area and according to what negotiators are able to achieve. This means, for example, that the transition period (if any) for financial services could proceed faster, or more slowly, than for immigration. The Prime Minister’s aim is to ensure a “smooth and orderly Brexit.”

The speech concluded with a warning to EU leaders that any attempt at a punitive Brexit deal would not be accepted by the UK government, which would prefer “no deal” to a “bad deal.” With “no deal,” the United Kingdom would cease to be an EU Member State two years following the date of the Article 50 notice of its intention to leave the European Union, with no transitional arrangements or ongoing obligations. The United Kingdom could then, as the Prime Minister suggested and other members of the UK government have previously stated, be free to lower its taxes, decrease regulation, and “change its economic model,” in a way to attract business and investment from the European Union.

For the financial markets, the Prime Minister’s speech provided some useful clarity that the United Kingdom will exit the EU’s single market and customs union, while leaving open the possibility of continued cross-border access by UK financial services firms (through new free trade and customs arrangements to be agreed between the United Kingdom and the European Union). May’s approach also would not hinder the potential application to the United Kingdom of the equivalence regimes in specific EU financial services legislation. However, the form that such final arrangements will take, and the specific services and firms that will benefit from continued cross-border access, will only be made clear after a lengthy negotiating process. In light of this continuing uncertainty and the time and resources required to shift business activities and personnel, some large financial institutions have indicated in the UK media that they will be deciding on their relocation arrangements soon. Some firms expect up to 20 percent of their London-based workforce to move into the European Union following Brexit.

The full text of the Prime Minister’s speech is available here.