EU review casts doubt on City’s hopes for ‘equivalence’ as Brexit last resort

Brussels is reviewing how it grants EU market access to overseas financial companies, casting doubt over the use of the bloc’s “equivalence” arrangements as a fallback option for the City of London after Brexit.

No decisions have yet been taken by the European Commission about the regime, which extends limited access rights to non-EU jurisdictions that have rules deemed equivalent, such as the US. But senior officials are re-examining existing equivalence rules, with an eye to streamlining and strengthening the approval process so it is more rigorous for systemically relevant jurisdictions.

Any move to tighten the access regime would signal Brussels will let Britain take nothing for granted in negotiations to exit the EU. It would also be a blow to the US and more than a dozen jurisdictions, who fear approval for their pending applications will be waylaid by Brexit politics.

One senior EU official said equivalence “is not automatic and is not a right” and was bound to be reconsidered in light of Brexit. Another noted that the patchy criteria needed to be clarified. The aim would be to create a more transparent process and recognise that deep financial interaction, such as with the US or UK, requires deeper equivalence checks.

The EU’s equivalence regime is relatively new, inconsistent from law to law, and largely untested. Brought in under Michel Barnier’s era overseeing post-crisis EU financial services regulation, its implementation now significantly hinges on his approach as the commission’s chief Brexit negotiator. From within the EU, Britain was the biggest champion of an open access regime.

Although it covers only a narrow range of financial activities, some City institutions and British officials see equivalence as a last resort to preserve basic access, particularly for trading, investment and clearing services. Investment banks in particular are bracing themselves for the Brexit-related loss of more comprehensive passporting rights, permitting the provision of financial services across the EU.

A senior French official who has discussed the issues with the commission said: “They are already reviewing all of this. The equivalence rules were never envisioned for the City.”

One negotiator in Brexit talks joked that overhauling equivalence would be like moving the legal goalposts “to another pitch”.

British ministers have admitted that the uncertainty around equivalence means it “wouldn’t necessarily work” for international banks in London. Mark Garnier, a trade minister, told Bloomberg that Britain would probably seek “a special hybrid” that was better than equivalence but different from a passport.

However, EU officials note any permanent “hybrid” arrangement would only be possible in a full trade deal, completed years after the UK has left the union. For this reason the existing equivalence regime would be an important basis for any transition arrangements.

The review comes as Brussels faces a number of sensitive equivalence decisions, wary of setting precedents that affect Brexit talks. It took the US and EU four years to make headway in relatively narrow equivalence negotiations around clearing houses.

EU officials recently cited Brexit when telling a number of jurisdictions to not expect an imminent equivalence decision from the Alternative Investment Fund Managers Directive. Around a dozen jurisdictions – including the US and Switzerland – have already been cleared by the European Securities and Markets Authority as meeting EU standards but the commission has delayed signing off the access rights.

Michael Collins of Invest Europe, which represents private equity and venture capital groups, said: “Firms across the world are left wondering what they should expect in terms of access to the EU market.”

Cross-border rights secured through equivalence are typically better than those granted by a national regulator, but weaker than a full “passport” to offer services across the EU. Existing rules open gateways for EU firms to use market infrastructure in a non-EU country, reduce restrictions on data transfers, or ease regulatory requirements for branches of non-EU firms.

However a wide-range of financial activities and regulations include no “equivalence” provisions. These include banking activities, such as lending and deposit taking, payments, custody and private wealth management.

Richard Reid, a research fellow in finance, banking and regulation at the University of Dundee, said he doubted there would be any appetite in Brussels to make the equivalence regime “less strict”.

“Even before the Brexit vote, the last financial crisis had fostered an environment of more intrusive regulation,” he said. “Now, with some in the UK arguing that perhaps one way forward for its financial services industry is to benefit from being freed from unwarranted EU legislation, it may be unrealistic to think that gaining EU equivalence recognition will be straightforward.”