And Even If Finance Gets A Brexit Deal, Equivalence Is Not The Answer

Following yesterday’s discussion of Brexit and its implications on financial services, there’s a little more to be said on this.

For example, every year at The Financial Services Club, we are delighted to host our friend David Doyle who, with precision-based analysis, talks us through the implications of EU Regulations on the Financial Markets of Europe. In recent years the discussion has obviously narrowed in focus towards the implications of Brexit and the City. Most of that dialogue has then narrowed further around a regulatory agreement called ‘equivalence’.

What is equivalence?

An equivalence agreement refers to a financial services agreement negotiated between the EU and a third country, which recognises the regulations of the third country as in compliance with, and therefore equivalent to, the EU’s own. This recognition allows firms from both the EU and the third country to operate within the territories of both.

According to the European Union, this brings benefits to both parties:

  • it allows authorities in the EU to rely on supervised entities’ compliance with equivalent rules in a non-EU country
  • it reduces or even eliminates overlaps in compliance requirements for both EU and foreign market players
  • it makes certain services, products or activities of non-EU companies acceptable for regulatory purposes in the EU
  • it allows less burdensome prudential regime to apply to EU banks and other financial institutions with exposures in equivalent non-EU countries

In theory.

In practice, this looks like a seriously wobbly route to follow. For example, last summer the Swiss, who follow an equivalence regime, were thrown out of Europe for being unequivalent. Last month, a lobby group for The City issued research that shows that equivalence will lead to a possible new financial market where the UK are just rule-takers and no longer rule-makers or even rule-shapers.

The 42-page International Regulatory Strategy Group (IRSG) report is titled:

The architecture for regulating finance after Brexit: Phase II

Here’s the Executive Summary:

This is the IRSG’s second report on the framework for regulating finance after Brexit. A key element of the first report, published in December 2017, was to propose principles for assessing the effectiveness of the regulatory framework including regulatory independence, regulatory accountability, coherence, flexibility, and clear and appropriate regulatory objectives. These were used to develop recommendations which analysed how to strike the balance between competing regulatory objectives and ensure ongoing consideration of broader public policy objectives.

Since December 2017, there have been some significant Brexit-related developments, including:

  • The passing of onshoring legislation which established the approach to identifying which UK bodies would mirror the various EU institutions, and transferring powers to those bodies accordingly.
  • Changing expectations about the future UK-EU relationship, with the Political Declaration noting that a future agreement would reflect the UK’s and the EU’s regulatory and decision making autonomy.

Other changes since the first report which add impetus to this second report include:

  • A renewed focus on the UK’s regulatory architecture with various actors in the public sector having spoken about the future of financial regulation in the UK.
  • The broader social and economic context in which financial services operate has evolved, with an increasing focus on financial services’ role in promoting sustainable business and on technological innovations in the delivery of financial services. These require a regulatory framework which enables a flexible, innovative and agile response from those involved in the development of public policy and financial regulation.
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