11 December 2016

Financial Times: An equivalence deal on Brexit may be the best the City can get

[...] There is, however, another way to soften the dilemma. That would see the City seeking regulatory “equivalence” as a way to continue selling into EU markets post-Brexit while operating from a UK hub. It would not require quantities of new legal or diplomatic heavy lifting, as equivalence provisions already exist in much (although not all) EU financial legislation; the biggest gap is lending. Critically the provision is in the sweeping Mifid 2 directive, which covers many investment banking activities.

Equivalence is in principle extremely attractive. EU business is, after all, only a subset — say 20 per cent — of most investment banks’ activities, and zero for domestic institutions such as building societies. The beauty is that it would not require the UK to replicate the EU rule book in its entirety — and certainly not for domestic business.

When Michel Barnier, now the EU’s lead negotiator on Brexit, cut an equivalence deal with the US over derivatives a few years ago, he stressed the principle that when two countries’ rules were “comparable and consistent” with each other’s objectives, it was “reasonable to expect [each] to rely on those rules and recognise the activities regulated under them as compliant”. Few could argue that Britain’s rules were not equivalent to European ones — they are currently identical. And with both sides following the same G20-led process of financial regulation, their objectives are carbon copies, too.

So why are the banks not keener on equivalence? The biggest issue is the lack of certainty. There is no agreed definition of what is equivalent when it comes to assessing different jurisdictions. There has been talk in Brussels of tightening the rules to make it tougher for non-EU jurisdictions to gain access. And, in principle, equivalence can be withdrawn at 30 days’ notice, leaving everyone in the lurch. Of course, it is worth noting that withdrawal would cut both ways, and would affect EU banks branching into London. Past experience also suggests that shared interests militate to keep these deals intact once they are going. An equivalence deal on futures between the US and foreign exchanges has lasted for more than two decades.

But it is clear that for any deal to work, some sort of political comfort would be needed. A deal should set out the basis on which equivalence would be defined and agree on processes for both dispute resolution and termination.

Could such a deal be struck? There are two reasons why Mr Barnier might conclude it was in the EU’s interests. A City wholly outside the EU would be free to compete furiously with it for business. In addition, London would, after Brexit, still be Europe’s biggest and most global financial centre. Equivalence is a way of preserving influence for Brussels over London’s rules. Equivalence is not a panacea; but nor is any competing option. It is perhaps the only viable deal, if the EU decides not to give Britain a special pass on single market access for finance. [...]

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