As Britain heads for Brexit, the EU has been setting out its rules regarding what it will consider as equivalence. So, what can we expect?
As I write this the Government has announced plans to suspend parliament and we seem to be hurtling towards a no deal Brexit with all the enthusiasm of Thelma and Louise heading towards a canyon. Of course, by the time I get to the end everything might have changed completely, but for now, no deal is looking more likely by the minute.
With that in mind, it’s worth looking closely at the European Commission’s latest communications on its rules surrounding financial equivalence for non-EU Countries. There’s a much more detailed review available on our Global Regulatory platform, but for now here are the picks.
Equivalence allows the Commission to recognise that the regulatory regime inside a third-party country is more or less equivalent to the corresponding framework within the EU.
When making a decision, the Commission will start an in-depth assessment by the Commission based on dialogue with authorities in the third country and involving, when appropriate, the European Supervision Authorities.
All decisions taken by the EU will be unilateral and balance the benefits against the need to preserve the integrity of the EU’s financial markets. A third country can apply, for equivalence at which point the Commission will consider the request.
After a country has been granted equivalence the EU will continue to monitor conditions within the country to determine whether it still meets the criteria. As part of this communication it revealed that it has repealed existing equivalence decisions for the first time in the field of credit ratings agencies for Argentina, Australia, Brazil, Canada and Singapore.
Under the withdrawal agreement the UK had initially sought access on the basis of mutual recognition, or that it would secure access but the EU insisted that cross border trade would only be feasible under the equivalence regime.
The problem is that Equivalence will take time to set up and is patchy. There are areas which will not be covered such as wholesale banking. Banks may have to move at least some of their operations abroad to continue benefitting from access to the European market and some have done exactly that.
The EU’s decisions are not always as heavily based on facts and figures as they would like to make out. Last year the EU allowed equivalence arrangements with Switzerland to expire over failed negotiations with a trading agreement.
What is meant to be a purely regulatory decision, then, can get political. The EU has already shown its willingness to use it as a tool in disputes between third party countries something which may come to the fore again if the UK and Europe go through a particularly messy divorce.
So, while this communication will add a sense of clarity about the Commission’s approach, there are still plenty of areas of uncertainty, especially if no deal turns out to be as acrimonious as we all suspect it might be.