The European Union is planning to get tough on the standards of financial equivalence, potentially dealing a big blow to the City of London’s hopes post-Brexit.
According to a report from the Financial Times, which cites a European Commission document obtained by the paper, Brussels intends to take “a more thorough approach” to deciding if financial rules in European nations are rigorous enough to be considered “equivalent” to EU rules.
Equivalence is a framework whereby the EU acknowledges that the legal, regulatory and supervisory regime of a non-EU country is as good as its own, and therefore allows that state access to the financial services sector within the bloc.
British banks currently have the right to “passport” their financial licences in one EU market to another, preventing them having to go through the costly and complicated process of being regulated in each market where they operate.
The financial passport’s status is strongly tied to Britain’s membership of the European Single Market, and as a result is widely expected to be lost as part of any Brexit deal.
That has led to discussions of some form of equivalence deal as the next best possibility if and when the passport is revoked. The City’s hopes are largely riding on an equivalence deal as the next best thing once the passport leaves London.
However, according to the FT’s report of the document, the EU is expected to tighten rules and ensure there are “sufficiently robust prerequisites,” to countries gaining access to the sector before it grants equivalence. This would include visits to overseas firms, and ensuring that the European Commission has “effective access to data,” in these institutions. The document is being used as “a way to provide some guidance to current and future counterparties.”
While the document does not contain any explicit mention of the UK, according to the FT, there are numerous allusions to Britain, with it noting that “a significant increase in the exposure of EU markets to an equivalent third country,” it says “would normally imply a need for a renewed assessment.”