When the EU and UK announced they had reached a memorandum of understanding (MoU) for continuing talks on cooperation for financial services trade, it was viewed as something of a breakthrough.
Despite comprising the majority of UK exports, services had thin representation in last year’s EU-UK Trade and Cooperation Agreement, including how services firms could operate in European markets after the end of the transition period.
Financial services on their own employ a million people in Britain and make up 7% of the UK’s total output.
While there are hopes that Brussels will grant the UK ‘equivalence’ status to maintain previous market access, what are the chances of this happening?
What is equivalence?
According to Professor John Ryan from the London School of Economics, equivalence grants ‘domestic market access’ within a country or trade bloc to foreign financial services firms on the basis that the foreign firm’s country has equally robust regulations to the market it is trading with.
Unlike ‘passporting’ access, which the UK had as a member of the EU, equivalence arrangements mean either side can unilaterally terminate access to each other’s market with 30 days’ notice.
Unwilling
So far, Brussels has only given temporary equivalence in two areas – for derivatives clearing houses and to settle Irish securities transactions.
A deadline to conclude ‘equivalence’ assessments before the end of June 2020 was missed, meaning the status was not granted as part of the overarching UK-EU trade deal signed at the end of that year.
The lack of an EU-wide arrangement for financial services has forced major UK-based banks to move more than £1trn of assets and thousands of jobs to EU financial capitals to avoid disruption.
Talking shop
Under the MoU, a Joint UK-EU Financial Regulatory Forum has been created to discuss future co-operation in the sector.
The forum’s activities should include “reducing uncertainty” and “identifying potential cross-border implementation issues” for rules in each market, the FT reported.
It also said that the two sides should co-operate to prevent “regulatory arbitrage” – where financial institutions are attracted to countries with weaker rules.
Stops short
The UK statement on the MoU noted that it created a “framework for voluntary regulatory co-operation in financial services” rather than any binding system.
City AM reports that the agreement will see regulators from the UK and EU meet twice a year but stops well short of granting UK anywhere near its previous market access.
Further discussions
While the new regulatory forum could be an important platform for future co-operation, some see it as no more than a talking shop.
Writing in the FT, columnist Helen Thomas said that rather than clearing the path, the MoU “feels more like the end of the road”.
Regulators already have channels to talk to each other and the memorandum only allowed further discussions and decisions to be made in the EU’s interests and on its own timeline, she argues.
“The reality is that equivalence decisions have always owed something to political expediency as well as regulatory alignment,” she said.
Opportunities beyond Europe
The longer the process goes on, the less value equivalence will have, and the City of London could lean more towards Asia and other emerging markets, Thomas said.
It could also look at broader international markets like currency trading, as well as emerging sectors such as fintech and green finance.
She concludes: “faced with years more UK-EU wrangling, looking for a future elsewhere is the pragmatic thing to do”.
New proposals
City of London minister John Glen has indicated he will publish proposals later this year for making the capital more attractive and competitive in the new post-Brexit era, according to City AM.
Former EU Commissioner for financial services, Jonathan Hill, has also admitted there is a growing realisation that the UK should not wait for the EU to give it market access, but should instead pursue a more global approach.
“The worst possible thing you can do is just sit there and hope the Europeans will come to our rescue,” Hill said at an event organised by the Centre for Policy Studies.
No rule-taker
Bank of England governor Andrew Bailey has also warned the EU that the UK will not be a rule taker in order to attain ‘equivalence’ status, and accused the bloc of requiring unfeasible standards from Britain, reported Sky News.
“This is a standard that the EU holds no other country to and would, I suspect, not agree to be held to itself,” he said.
Bailey said the UK should refuse to allow Brussels to restrict how UK industry develops and look instead to global financial regulators as the main rule makers.
Short shelf-life
Baroness Rita Donaghy, the chair of the House of Lords committee reviewing future UK-EU relations, has said that “equivalence has a short shelf-life” and that the UK may need to, at some point, move on.
“If you’d asked us in the early autumn, we’d have said that equivalence is vitally important for every area and need to be sorted but things have developed. Equivalence has a short shelf life,” she said.
“The atmosphere at the moment is rather cool, and that doesn’t help,” she added.