The U.K. House of Commons has approved the Withdrawal Agreement. Assuming this is ratified by the EU, and Royal Assent is achieved in time, the U.K. will leave the EU on January 31, 2020, entering into a “transition” or “implementation” period during which most of the EU’s arrangements and legal regime will continue to apply in the U.K. This period is planned to end on December 31, 2020, leaving just 11 months for the EU and U.K. to reach mutual agreement on their future relationship. The European Commission’s Brexit Task Force is gearing up preparatory work for these negotiations. One of the first steps was the publication on January 10, 2020 by the Commission of a presentation to the Council Working Party on personal data protection and cooperation and equivalence in financial services.1 The presentation sets out the Commission’s intended approach to equivalence in financial services and data protection.

Currently, all EU (including U.K.) firms have access to markets and customers across the EU, pursuant to financial services “passports,” which allow such access on a cross-border basis without the need for local companies to be set up or local regulatory licenses to be obtained. The passport will fall away for the U.K. at the end of the transition period, meaning that EU27 firms will lose this form of access to U.K. markets and investors and, similarly, U.K. firms will lose access to EU27 markets and investors, unless other arrangements are agreed. However, the EU and post-Brexit U.K. will each have in their laws a separate system known as “third-country equivalence,” which, with less extensive coverage, allows for access by third-country firms. The Commission’s presentation, for the first time, provides insights into its thinking, timing and processes for equivalency assessments for the U.K.

In terms of timing, both the U.K. and the EU committed in the amended October 2019 Political Declaration2 to making “best endeavors” to finalize their respective equivalence assessments by June 2020. The Commission’s presentation reaffirms this position. This should provide a welcome and to date absent degree of certainty and confidence for firms and their customers.

In terms of how assessments will take place, some of the presentation reiterates the principles set out in the amended Political Declaration agreed between the U.K. and EU27 negotiating teams. In particular, equivalence decisions will be unilateral, will be discretionary and will not be open to negotiation. This seems to preclude, at least for now, any process or review of sovereign equivalence decisions or revocations. The parties are, however, committed to preserving financial stability, market integrity, investor and consumer protection and fair competition and will respect the other’s regulatory and decision-making autonomy and ability to take equivalence decisions in their own interest.

Notably, there is no commitment in the paper to “plug the gaps” in the existing EU equivalence framework, which does not provide the comprehensive access that passporting allows. There is also no indication of an intention to agree a more robust and transparent process to ensure more certainty around equivalence. There is no suggestion in the presentation that the EU intends to adopt an enhanced approach to equivalence, either with the U.K. or other non-EU countries seeking access to EU markets. The U.K. Government White Paper,3 published by former Prime Minister Theresa May’s government, presented an intention for new arrangements based on an enhanced equivalence regime to be put in place. Such a regime would be based upon Shearman & Sterling partner Barney Reynolds’ publications which originated and developed the concept of Enhanced Equivalence and provided treaty and legislative text4, and we understand that such a model, which involves a closer relationship as suggested by the EU, remains the Treasury’s preferred outcome for financial services.

This White Paper and Reynolds’ paper highlighted that the existing equivalence frameworks would better be expanded, because the EU’s equivalence regime does not cover the breadth of U.K. and EU financial services provision and because there are no provisions that ensure a transparent and predictable process for the granting of equivalence.

The Commission’s Task Force confirms that where there is an equivalence regime, the EU will assess the U.K.’s regime, and that the U.K.’s laws and regulations will be assessed on a sovereign discretionary basis by the EU, for equivalence purposes. The level of alignment required to meet the test of equivalence will be risk-based, meaning that where the impact on the EU markets and interests is higher (as it is for the U.K.), the EU will undertake a more granular or line-by-line assessment. This is in line with previous Commission papers analyzing its approach to equivalence.5

The Commission’s tone has changed drastically from previous announcements that it would only provide equivalence “necessary to safeguard financial stability in the EU27,”6 e.g. in the case of the equivalencies granted to central counterparties ahead of previous Brexit deadlines.7 Notably, since the U.K. and EU have reached a deal on citizens’ rights and on funding the EU budget, the EU seems prepared to be more pragmatic and less hard-nosed about ensuring that Brexit does not disrupt its or the U.K.’s economy.

The Commission’s presentation stresses that the level of access under equivalency is materially lower than that in the single market, playing to its internal gallery in this respect. However, we understand that the Commission is separately looking at older financial services legislation that lacks a third country equivalence regime, such as the Settlement Finality Directive, with a view to updating it, a need highlighted by industry associations and others. The timetable for plugging some of the gaps in the existing framework to ensure that a deal-based Brexit does not disrupt the financial markets is, however, uncertain.

The U.K. government has yet to set out its position on these issues, subsequent to the election in December 2019.


1. Internal Preparatory discussions on future relationship, European Commission, task Force for Relations with the United Kingdom, January 10, 2020.

2. Political Declaration Setting out the Framework for the Future Relationship Between the European Union and the United Kingdom, October 17, 2019.

3. The Future Relationship between the United Kingdom and the European Union, July 2018.

4. B. Reynolds, “A Template for Enhanced Equivalence,” Politeia, July 10, 2017, “EU-UK Financial Services After Brexit Enhanced Equivalence - A Win-Win Proposition,” New Direction / Politeia, February 28, 2018 and “Free Trade in U.K.-EU Financial Services – How Best to Structure a Brexit Free Trade Deal,” Politeia, October 17, 2018. An analysis of the position for each sector of the financial market and the steps needed for equivalence are discussed in our client note, “ Brexit and Equivalence: Review of the Financial Services Framework Across All Sectors.”

5. Communication from the Commission, Equivalence in the area of financial services, COM(2019) 349 final, July 27, 2019.

6. Preparing for the withdrawal of the United Kingdom from the European Union on 30 March 2019: Implementing the Commission’s Contingency Action Plan, COM(2018) 890, December 19, 2018.

7. Implementing Decision (EU) 2018/2031 (OJ L 325, 20.12.2018, p.50) (since amended by Commission Implementing Decision (EU) 2019/2211 to extend CCP equivalence until January 31, 2021 (OJ L332, 23.12.2019, p.157)).

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