25 July 2016

Financial Times: City of London eyes ‘equivalence’ as post-Brexit link with EU

[...+ As the name suggests, equivalence offers market access to groups based in countries who can show that their financial sector regulation is just as tough as that of Europe. The possibility is set out in various pieces of EU regulation governing financial trading.

While some law firms and others have cited these provisions as offering a potential panacea for the City of London’s post Brexit concerns, policymakers warn of complications ahead.

“Getting agreement on equivalence isn’t easy,” Jonathan Hill, the former British member of the European Commission who resigned in the wake of the Brexit vote, said in May, adding that even the rights secured are far more piecemeal than the passport.

Ironically, equivalence is partly a British invention. The UK pushed for it to ensure Europe remained open for business with the world, little imagining it might one day need to call on them itself.

What is clear is that such a path would need considerable EU goodwill — something that may be in short supply after wrenching Brexit talks.

Requests for equivalence go through intense scrutiny. Companies or authorities applying are first vetted by the European Securities and Markets Authority, which brings together market watchdogs from all EU countries. Should it give a positive assessment, it is up to the commission to decide the next steps, but it has no deadline or compulsion to do so.

Kay Swinburne, a British Conservative member of the European Parliament, said this two-stage process “potentially makes life awkward”.

Equivalence also requires countries to keep their rules aligned with those of Europe, without any say in what the EU does — a particular challenge given Brussels’ tendency to update its standards every few years.

For Judith Hardt, head of the Swiss Finance Council, the fact equivalence exists is a sign of how Europe has “traditionally been much less protectionist than other jurisdictions” in the area of financial services.

“Unlike others, it has designed a system to allow third-country firms to passport in under their local rules,” she said. But it is the practice rather than the theory that has on occasion proved complicated.

While the EU has adopted a range of equivalence decisions in recent years for countries including Switzerland, Bermuda, Australia and Brazil, one example still haunts EU officials: the marathon talks needed before Brussels would accept that certain US trading rules were as tough as its own.

“That negotiation on that one narrow issue took four years, even though there was goodwill on both sides,” Lord Hill said.

Even after Brexit, Britain’s days of haggling with Europe over the finer points of financial regulations could be far from over.

Full article on Financial Times (subscription required)

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