Today’s ‘equivalence’ regimes
The EGOV briefing “Third-country equivalence in EU banking legislation” analysed in detail the key differences between:
‘passporting’ rights for firms established in a Member State or in an EEA country (enshrined in secondary legislation), and
‘equivalence’ regimes for third countries (provided for in secondary legislation dealing with financial services) that may be discretionarily activated or revoked by the Commission.
‘Equivalence’ refers to a process whereby the European Commission assesses and determines that a third country’s regulatory, supervisory and enforcement regime is equivalent to the corresponding EU framework. That recognition makes it possible for the competent authorities in the EU to rely on third country entities’ compliance with the third country framework which has been deemed ‘equivalent’ by the Commission. Equivalence decisions can include conditions or limitations, to better cater for the objectives of granting equivalence.
Proposed changes to existing ‘equivalence’ regimes
The Commission has recently proposed regulatory changes to enhance some EU equivalence regimes: in September 2017 as part of the ESA review, in December 2017 as part of the Investment Firm review, and in June 2017 in relation to a review of EMIR. Those proposals are being discussed at Parliament and Council.
The equivalence regime and Brexit
When the UK will become a third country - and without prejudice to any transition that may be agreed upon as part of the withdrawal agreement - EU legislation providing ‘passporting’ rights within the EU will no longer apply to financial services providers established in UK. In the context of firms’ preparedness for the Brexit scenario, the Commission has recently published a number of notices outlining the legal consequences attached to the loss of ‘passporting’ rights in different financial services legislation, including banking, investment services, derivatives and asset management.
As emphasised by the Commission, firms will need to get an authorisation (i.e. a new legal entity established in the EU or extension of an existing licence) from EU competent authorities to fully keep the benefit of the internal market (i.e. ‘passporting’ rights). This is without prejudice to equivalence decisions that may be adopted by the EU in accordance with specific sector legislation.
Brexit-related supervisory challenges
In its July 2018 opinion on firms’ preparedness to Brexit, EBA emphasised that “progress in the preparations of financial institutions for the potential departure of the UK from the EU without a ratified withdrawal agreement in March 2019 is inadequate”. The ECB and EBA have urged firms to step up their efforts in implementing contingency plans, while further outlining supervisory and regulatory expectations. The issue is being raised as to whether contract continuity for derivatives may need a “public solution” absent satisfactory preparation.
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