Brussels: The European Union will consider offering the UK “improved equivalence” for financial services after Brexit, according to the latest draft of the bloc’s negotiating position, a system Britain has rejected as “wholly inadequate.”
It’s not clear what “improved” would mean. What is clear is that the EU is rejecting the UK’s bid for its banks to have access to the EU on the basis of mutual recognition of rules. British institutions would only be able to trade in the EU if its rules are deemed equivalent by the European Commission — a unilateral approval that can be withdrawn at short notice.
Equivalence also means limited access to the bloc’s single market and accepting rules without having a say in making them — something the UK government and its banks reject. The commission has already started to review financial services legislation, to ensure that equivalence rules are appropriate for the situation after the withdrawal of the UK, according to the document seen by Bloomberg.
“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,” reads the draft.
“Equivalence mechanisms and decisions remain defined and implemented on a unilateral basis by the European Union,” it says.
The addition is in an annex to the draft guidelines and will be discussed by EU ministers meeting on Tuesday. Earlier drafts didn’t mention financial services explicitly although they made clear that the trade agreement the EU intends to strike with the UK wouldn’t make special provisions for services.
Market access for services would only be allowed “under host state rules, including as regards right of establishment for providers, to an extent consistent with the fact that the UK will become a third country and the union and the UK will no longer share a common regulatory, supervisory, enforcement and judiciary framework,” according to the bloc’s guidelines.
Passporting gone
UK banks and the government have long given up hopes of retaining passporting rights — the single market access that allows them unhindered operation across borders. But they are now pushing for a system of mutual recognition. They want a set of rules that are more durable and not subject to unilateral withdrawal.
Chancellor of the Exchequer Philip Hammond has tried to make the case that a good deal on financial services, which allows the City of London to remain a financial hub, is in both sides’ interest. He also argues that any trade deal with the EU that excluded services wouldn’t be fair. He has described equivalence as “wholly inadequate,” saying any arrangement has to be “reciprocal” and “reliable.”
But the EU has said the UK’s decision to leave the single market means it can’t pick and choose the bits of the EU internal market where it wants to maintain access. It argues that financial stability is at stake, as well as the integrity of the single market.
The commission has recently started to address some shortcomings of its equivalence regime. In December, it proposed to tighten the procedure for allowing firms access under MiFIR, a regulation that includes a third-country regime for a range of investment services. The aim was to set out the requirements for equivalence “in greater detail,” according to the commission.
In an apparent nod to the UK, the commission made clear that an equivalence recognition wouldn’t be easy to obtain. The assessment would have to be “very detailed and granular and also assess supervisory convergence with the EU” when it comes to third countries whose firms may be of “systemic importance” to the bloc, the commission said.
