28 February 2017

European Commission: EU equivalence decisions in financial services policy: an assessment

The purpose of this Staff Working Document is to provide a factual overview of third-country provisions in EU financial services legislation. It examines the current legal framework and interactions with supervisory work within the EU and with international counterparts. It explains the process that culminates in a determination, by the Commission, of the equivalence of third-country rules and supervisory systems. Lastly, it takes stock of the Commission's experience with the equivalence framework.

Whenever the Commission determines by way of an equivalence decision that a foreign regulatory, supervisory and enforcement regime is equivalent to the corresponding EU framework, that recognition, in turn, usually makes it possible for authorities in the EU to rely on supervised entities’ compliance with the equivalent foreign framework. Benefits accrue to both the EU and third-country financial markets.

An equivalence determination should achieve some or all of the following:

• reduce or even eliminate overlaps in compliance for the EU entities concerned and in the supervisory work of EU competent authorities,
• allow the application of a less burdensome prudential regime in relation to EU financial institutions’ exposures to an equivalent third country than would otherwise be the case for exposures to non-equivalent third countries,
• provide EU firms and investors with a wider range of services, instruments and investment choices originating from third countries that can satisfy regulatory requirements in the EU.

Equivalence determinations are an essential part of the EU regulatory toolkit for financial services. They underpin the international activities of EU financial intermediaries and allow in some cases non-EU intermediaries to operate in the EU. They also facilitate cross-border regulation and supervision. The careful risk calibration behind the approach also fosters competition and efficiency in EU markets through proportionate equivalence assessments focussing on risks and proper enforcement arrangements.

This Staff Working Document sets out the experience gained with the implementation and enforcement of third-country provisions in EU post-crisis financial legislation. It should facilitate understanding of the principles underpinning the equivalence framework, and highlight that continuous work is necessary to enhance the overall framework in the interest of better effectiveness. Ultimately, the reduction of regulatory gaps and overlaps with non-EU jurisdictions is beneficial also to the wider EU economy and is an important catalyst of jobs and growth.

Full document

Related article: Brussels sets out tough new line on equivalence

The City of London’s hopes of maximising access to the EU are set to be dealt a blow by European Commission plans to take a tough stance on rules that could provide a post-Brexit lifeline for the UK financial sector.

Sample the FT’s top stories for a week You select the topic, we deliver the news. Select topic Enter email address Invalid email By signing up you confirm that you have read and agree to the terms and conditions, cookie policy and privacy policy. A document obtained by the Financial Times sets out Brussels’ goal of a more thorough approach on whether to deem other jurisdictions’ rules as “equivalent” — a vital issue for the City. The paper discusses steps such as a more methodical process of reviewing equivalence decisions, including on-site EU inspections of foreign financial institutions.

An EU official characterised the document as “a way to provide some guidance to current and future counterparties” about how the equivalence rules will be applied.

[...] the commission’s “staff working document” emphasises Brussels’ determination to carry out “continuous follow-up monitoring” to make sure countries deemed equivalent still meet the criteria. It also stresses the commission’s power to withdraw the status at any time in light of “contrary developments”.

Brexit supporters argue that the UK could disentangle itself from the EU’s financial rules while still benefiting from market access. But the document makes clear that one of the commission’s prime concerns is to make sure that no country can get or keep equivalence if it conducts a regulatory bonfire or retreats to light-touch supervision.

Without naming Britain, it notes that the commission should be particularly rigorous in assessing equivalence requests from “high impact” countries, where “an equivalence decision may be used intensively”, and where any lapses in regulation and supervision could “significantly jeopardise financial stability or market integrity in the EU”.

The document argues that the EU should set “sufficiently robust prerequisites”, or conditions, before it grants equivalence, including the “on-site” inspections of overseas firms operating in Europe and “effective access to data”.

Full article on Financial Times (subscription required)

© European Commission