What Britain's Brexit Equivalency Plan Means for Banks

UK banks have had to reduce their expectations regarding their trade relations with the European Union after leaving the UK. The British government has abandoned its initial demand that Britain-based banks retain easy access to the bloc, instead proposing a framework based on a framework available to countries outside the EU. This is an arrangement known as regulatory equivalency. And this is a plan on which the EU could be ready to subscribe.

1. What is regulatory equivalence?

In general, Nation A agrees that the B-Nation rules are as strict as its own, and allow the B-companies to conduct a limited number of transactions on its territory as long as it deems fit. Under EU law, the European Commission designates the rules of a third country and its monitoring of specific activities as "equivalent" on the basis of assessments made by the union's own supervisors. The commission can take as long as it wishes.

2. Would it work?

For the UK financial sector, a standard equivalence system has enormous drawbacks, the most important of which is that it has been granted unilaterally by the EU and can be canceled with 30 days' notice. This hardly provides the predictability and stability that companies crave. The current process of granting equivalence is also scattered in many pieces of legislation and would open the door only to certain parts of the financial industry, excluding deposits and transfers. loans.

3. What is the solution?

A developed version. That is what the Premier's government, Theresa May, proposed in July. May's white paper proposed to include more services and how to ensure market access autonomy for each party, while preventing companies from being kicked out overnight. According to an article in the London Times on November 1, the two sides are on the verge of reaching an agreement based on equivalence – but with some additional features to make it more palatable. According to the Times, the main benefit is that the notice period for withdrawal of equivalency would be much longer than 30 days and that neither party would unilaterally deny access without arbitration.

4. How did we get here?

Initially, the banks hoped to retain their so-called passport rights to continue selling their products and services in the European Union after Brexit. Once this perspective faded, they hoped for at least a "mutual recognition" by the UK and EU of the respective regulations, which would have allowed London-based banks to continue serving the EU with a minimum disturbance. For the EU, both passport and mutual recognition resembled "selective choice": the UK was trying to take advantage of the benefits of membership in a bloc without respecting the obligations of membership. The change in the UK reflected his understanding that, after Brexit, the EU will not allow UK banks to continue operating as they did.

5. What did the British industry say about this plan?

Reactions were mixed when May proposed it for the first time in July. TheCityUK, representing the financial services sector, lamented the decision not to call for mutual recognition, along with the City of London Corporation, which manages the financial district of the British capital, and described the proposal of "real blow". UK Finance, which represents about 300 companies in the banking sector, acknowledged the shortcomings of existing equivalence agreements and said the "government is right" to seek to strengthen them. The Association of Financial Markets in Europe, whose members focus on wholesale markets, said it hoped the plan "would serve as a basis for negotiations to move forward" towards a deal that preserves financial stability.

–With the help of Silla Brush.

To contact the reporters on this story: John Glover in London at [email protected]; Emma Ross-Thomas in London at [email protected]

To contact the editors responsible for this story: Neil Callanan at [email protected], Grant Clark, Patrick Henry

© 2018 Bloomberg L.P.