European Union: Free Trade In UK-EU Financial Services – How Best To Structure A Brexit Free Trade Deal

Last Updated: 19 October 2018
Article by Barnabas W.B. Reynolds

Summary

Enhanced Equivalence: Principles and Practice for a UK-EU Financial Services Trade Deal

There is little doubt about what would be the best picture for UK-EU free trade in financial services after Brexit. But what will be critical is how durable the chosen framework will prove. Although the Government's current proposal is fundamentally sound, improvements should be made and careful implementation is needed if it is to succeed.

Mutual Recognition

The negotiation on financial services must, as has been made clear by the UK Government, result in some form of mutual recognition of regulatory provisions and supervision. For many reasons, as set out in a previous publication A Template for Enhanced Equivalence (hereafter, the Template),1 it is now common ground that there is no other viable method for allowing the cheapest possible access to liquid capital across Europe and the avoidance of the unnecessary costs of duplicative regulation, consistent with the referendum decision. The UK is host to global financial markets, most of which have nothing to do with the EU. From the EU's perspective, the prize is to come up with an arrangement that allows global businesses most easily to serve European customers and for European customers to have the most efficient access to global capital. Capital costs are crucial for economic welfare and growth, enabling European businesses to build, invest and prosper – and enabling European citizens to save for health, lifestyle, retirement and other purposes. From the UK's perspective, the prize will be minimal disruption to its markets, market participants and access to the EU customer-base.

In the language of EU financial services, this mutual recognition manifests itself in the concept of 'equivalence', whereby the EU recognises the regulatory standards of another jurisdiction to be 'equivalent' to its own (and vice versa), and therefore does not seek additionally to impose its own regulatory standards on firms regulated in that other jurisdiction, even when they are performing services within the EU.2 The standards need not be identical, but must overall be seen as achieving equivalent high-level outcomes — a principle which acknowledges individual jurisdictions as being better placed to identify local problems.

In order to recognise the other jurisdiction in this way, key interests need to be protected, often with common aims. In particular, both parties will need to ensure they do not incur unacceptable systemic risk, since that puts taxpayer monies at risk as was seen in the 2007-8 financial crisis. Both parties will also wish to protect their consumers (i.e., retail customers) by ensuring products or services sold or delivered to their consumers meet certain requirements and the sales process makes clear where protections are different when buying from abroad rather than from local suppliers.

Why is any Equivalence-type Concept Necessary at All?

Equivalence is not required in every context. For wholesale investment business, the UK allows foreign businesses to deal with parties in the UK without regulation, using its 'overseas persons' exclusion.3 The EU seeks to do the same through its so-called 'reverse solicitation' exclusion, under which EU customers can reach outside the EU to access services and products from elsewhere, becoming subject solely to the protection of the provider's regime.4

However, across other matters, such as commercial banking and insurance, this is not the case. Nor is it the case that the EU applies reverse solicitation in as clear-cut and expansive a manner as that in which the UK applies the overseas persons exclusion for investment business, allowing free and unrestricted relationships to be formed in a broad context. The EU has generally so far been reluctant to allow foreign businesses to market financial services and products to the benefit of EU customers without seeking to exercise control.

Equivalence - What it Promises

The advantage of equivalence is that in those areas of financial services where equivalence is granted from time to time, UK businesses will be permitted to operate across the EU markets without further licensing, additional compliance requirements or EU supervision. The same is true for EU businesses wishing to operate in the UK markets so long as EU standards are equivalent to those in the UK.

In this way, the end result that the City's financial businesses have urged would be achieved.5 Such an equivalence agreement would avoid the need for business adjustment as a result of Brexit or additional expense being incurred in altering current business models for servicing EU27 clients.

A successful equivalence framework in the Brexit context would provide for mutual recognition of financial regulatory standards between the UK and EU in a flexible manner. It would allow each jurisdiction, after Brexit, to operate in its own way, not being formally tied to the other – although, of course, in many cases they are likely to mirror each other in terms of making rules for and regulating safe financial markets, as those areas are mostly driven by global standards.

Because it is based on the existing EU legal concepts for financial services, equivalence could form one of the best workable bases for both parties, having been developed by, and therefore being familiar to, both the UK and the EU. Equivalence as a concept has been extensively worked out in law already and is now used internationally as a proven basis for successful financial services trade.

There are numerous equivalence regimes already operational in EU law,6 and the approach is already in use for the EU's trading relationship in financial services with the US, Japan, Singapore and elsewhere.7 For the US, for instance, central counterparties based there can be recognised by the EU as being acceptable to satisfy the G20-driven obligations requiring certain EU businesses to enter into any liquid derivatives contracts with central counterparties rather than bilaterally with other market participants. By building on this approach, the proposal goes with the grain of existing law which the UK has worked on whilst part of the EU.

Improving the Equivalence Concept

As explained in previous publications, the concept of equivalence as it stands is inadequate for the UK-EU relationship, in part because it was not developed to cover the extensive activities and depth of such a significant relationship.8 Therefore, improvements need to be made.

It should cover the full range of services, activities and products, including lending, insurance, settlement finality and retail financial business.9 Moreover, in terms of definition and legal certainty, it should be made clearer that equivalence is determined by reference to high-level outcomes, where possible based on international standards.10 The existing equivalence processes need to be rendered more consistent.11 And there needs to be objectivity and procedural certainty over when equivalence is to be granted.12

The definition of outcomes is key, since it is on this that the workability of the equivalence concept depends. The proposal in the Template is that the outcomes achieved by both sets of rules should be defined at a sufficiently high level such that neither party is a rule taker from the other. This is accomplished by ensuring any outcomes required are, where possible, based on objective international standards. Where those standards are inapplicable or ill-defined, the outcomes would be agreed upon at a technocratic level between the UK and the EU.

The Goal

The goal is to establish an attractive and workable solution for both parties:

  • The UK would be able to legislate and regulate in a manner consistent with the Common Law, ensuring a proper marriage of legislation, regulation and predictable judicial interpretation.
  • The EU could continue unfettered with its own legislative and judicial approach, which works for the EU.
  • The proposed regime would fill in the gaps found in the existing EU framework,13 to the benefit of the EU, not just in relation to the UK.
  • It would provide for cooperation mechanics for supervision and enforcement, and information flows between regulators.14
  • There would be collaboration on new legislative and regulatory initiatives.15
  • There would be an independent tribunal which oversees the application of the equivalence definition and the procedures for granting and withdrawing equivalence,16 providing the necessary certainty for businesses.
  • So long as the relevant outcomes are met in a particular area of financial services business, then access would be maintained in that area.

Because each party's rules are currently identical there would be equivalence across all areas on day 1 of Brexit. After that, either party could at any point decide not to continue with equivalence-based access in a particular area for its businesses to the other party's jurisdiction and could make entirely different rules in that area which did not achieve equivalent outcomes to those achieved by the other party. This seems unlikely for the UK since the UK has been and remains instrumental in developing international standards, but the optionality is built into the arrangement for such radical divergence to occur.

Footnotes

1 A Template for Enhanced Equivalence: Creating a Lasting Relationship in Financial Services Between the EU and the UK, by Barnabas Reynolds, Politeia, July 2017.

2 For further information on equivalence in the Brexit context, see Section 2, A Template for Enhanced Equivalence ('Introducing Equivalence: The EU and the Concept of International Mutual Recognition').

3 Article 72, Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544).

4 Recital 111 and Article 42, Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (MiFID II); and Recital 43 and Article 46(5), Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012 (MiFIR).

5 See, for example, Brexit and UK-based Financial and Related Professional Services, TheCityUK, 12 January 2018.

6 These are set out in Annex A, A Blueprint for Brexit: The Future of Global Financial Services and Markets in the UK, by Barnabas Reynolds, Politeia, November 2016.

7 See Annex C of A Blueprint for Brexit.

8 Section 3, A Template for Enhanced Equivalence ('Making Equivalence Work').

9 See Annex B of A Blueprint for Brexit.

10 See Section 5 of A Template for Enhanced Equivalence and Section 8 of EU-UK Financial Services After Brexit - Enhanced Equivalence: A Win-Win Proposition, Barnabas Reynolds, New Direction-Politeia, February 2018.

11 Ibid.

12 Ibid.

13 Article 5(1) of the Draft Equivalence Regulation in A Template for Enhanced Equivalence.

14 Article 3(2)(e) of the Draft Equivalence Regulation in A Template for Enhanced Equivalence.

15 Article 6 of the Draft Equivalence Regulation in A Template for Enhanced Equivalence.

16 Article 9 of the Draft EU-UK Bilateral Agreement in A Template for Enhanced Equivalence.

To view the full article, please click here

Originally published in Politeia

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Barnabas W.B. Reynolds
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions