Industry Criticizes Equivalence Measures in Europe’s Brexit Stance

These discussions follow on from the latest draft of the European Union’s (EU’s) negotiation guidelines published this month, which suggest the UK and the EU’s post-Brexit relations should rely on “appropriate” rules, cooperation and access to markets.

In a revised version of the European Council’s negotiation guidelines, seen by WatersTechnology, the EU will offer “improved equivalence” for UK financial services, but the meaning of this is unclear.

“Regarding financial services, the aim should be reviewed and improved equivalence mechanisms, allowing appropriate access to financial services markets, while preserving financial stability, the integrity of the single market and the autonomy of decision making in the European Union,” the document says. “Equivalence mechanisms and decisions remain defined and implemented on a unilateral basis by the European Union.”

Equivalence is the process by which the EU deems a foreign nation’s rules to be substantially similar to its own, and therefore can be used in lieu of the EU’s rulebook by European entities. The Council is set to meet this week to make the recommendations official.

“You can read it two ways,” says a London-based lobbyist with direct knowledge of the UK government’s stance. “One, it’s a slim victory that we’ve managed to get the French to include something about financial services at all. Two, and this is where I would tend to agree, it costs the EU little yet ultimately ties the UK very firmly to following the course of EU regulation in order to continue accessing markets, with the EU able to cut that access with very thin reasoning.”

At the heart of the negotiations is a desire to preserve some form of service passport, an ambition that has always been somewhat fanciful, given the UK’s stated intent to depart the single market. Such a mechanism would allow firms based in London to market their services throughout the remaining 27 members of the EU, after the UK leaves.

However, the EU position has firmly been that the UK cannot cherry pick aspects of EU freedoms that it likes, such as the single market, while restricting those that it does not, such as free movement of EU citizens. France, eager to pick up business from firms leaving London to remain within the borders of the EU, is seen as one of the most antagonistic toward offering a deal to the UK financial services sector.

This, experts say, is one of the reasons why even full transitional access to the single market will not be enough to persuade firms that there is a sufficient plan for what happens after Brexit.

“Frankly we’ve run out of patience,” says the CEO of a London-based fintech vendor, which is planning to move key personnel and services to Frankfurt ahead of the UK’s departure from the EU. “Even if they’ve agreed transitional access, if we’re relying on the EU system of equivalence, there’s no guarantee the rules won’t change in a way that’s unacceptable to London soon after—just look at all this nonsense over clearing relocation. Then we’re right back to square one.”

They add that the lead time required to shift infrastructure and personnel, acquire office space, become comfortable with local laws and regulations, and develop timeframes for client migrations mean that companies must begin planning now.

Even those at the coal face believe that equivalence is a flimsy basis for a trade deal. Rachel Kent, head of financial services regulation at law firm Hogan Lowells says that such a deal would be insufficient in covering all trade activities and would require the UK to be subject to rules and controls it has no influence in formulating.

Kent, who is also an executive board member of the International Regulatory Strategy Group (IRSG), was one of the individuals responsible for drafting a blueprint for a free trade agreement between the EU and the UK, published by IRSG. Elements of that blueprint were later incorporated by the UK government into its negotiating platform, and have been acknowledged by figures as senior as British Prime Minister Theresa May.

Many of the suggestions outlined in the agreement point to an aligned framework that allows for minimal friction, free trade and mutual access to the financial markets. Kent says a deal based on equivalence would disrupt the capital markets, and if a free trade agreement were to fail, it would have a major impact on global markets. 

“If it doesn’t go ahead, the main impact on capital markets is that they will be fragmented, and I don’t just mean across the EU,” she says. “Lots of people have told us that the double capital and the cost issues are such that they would take the activity back to the US or to Asia, or to move it to a more capital-friendly environment. So it is not the case that if the UK loses the EU wins. The cost of fragmentation is thought to be a significant issue and that is probably the main difference, as well as everything being more expensive.”

Other agree. Miles Celic, CEO of TheCityUK, a lobby group that promotes UK financial interests, referenced the IRSG framework and says that the industry is “convinced that mutual regulatory recognition is the best option.”

“Equivalence in its current form was never designed to carry the weight of a UK–EU trade relationship,” he says. “We are now getting down to the brass tacks of the negotiation and it’s time for the economics of the deal to take the front seat.”