The European Union’s most senior financial services official has poured cold water on Britain’s hopes of getting a bespoke deal for the sector once the Brexit process is complete.

UK financial trade with EU nations

European Commission vice-president Valdis Dombrovskis, who has responsibility for financial services, told a conference in London that the existing system of ‘equivalence’, which currently allows foreign firms from 30 non-EU nations to trade in the bloc, would work for the UK after Brexit.“Equivalence is not perfect, neither for firms nor for supervisors,” Mr Dombrovskis conceded, “but we should not let perfect be the enemy of good.Equivalence has proven to be a pragmatic solution that works in many different circumstances, and it can work for the UK after Brexit as well.”His comments at the City Week conference are in stark contrast to Prime Minister Theresa May’s aim of achieving a “collaborative, objective framework that is reciprocal (and) mutually agreed”.

London-based financial sector concerned

The UK, which will lose the ‘passporting rights’ that currently enable the London-based financial sector to sell products across Europe, does not like the equivalence system because it would effectively give Brussels supervision over UK regulations and could be withdrawn at short notice.Banks are anxious to know what post-Brexit arrangement will be in place as it will determine how many of current London-based posts they will need to relocate to new European hubs.Even before Mr Dombrovskis’s speech, senior banking officials from both Switzerland and Britain had spoken out against the equivalence at the City Week conference. Jorg Gasser, Switzerland’s secretary for international finance, said his country was finding it difficult to get EU approval for its own bid for equivalence. “As you can well imagine, the European Union is not ready to find progressive or interesting solutions that might serve as a precedent for the negotiations between the European Union the United Kingdom,” he said.“Technically we are equivalent – no one contests that. All the technicalities have been solved for a very long time, but the (decisions on) equivalence are never only technical: they are most of all political. That makes it difficult.”

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And in his address to the conference, Lord Blackwell, chairman of Lloyds Banking Group, said equivalence could result in the UK losing its competitive edge.“I think the UK will need to be wary of seeking equivalence under a regime that means the UK had to adopt all of the EU directives, as the EU without the UK may have a less friendly attitude towards market activities,” he said.“And the UK’s primary objective must be to preserve its global competitiveness. So mutual recognition, I think, is the best way forward.”Mr Dombrovskis, who is in Britain to meet with Chancellor of the Exchequer Philip Hammond and Mark Carney, the governor of the Bank of England, accepted in his speech that equivalence decisions “are and will remain unilateral and discretionary EU acts”.He added, “Even in trade agreements, governments do not give up power over their core responsibility to protect financial stability. Equivalence is only possible if there is close convergence of rules and supervision. If the EU and a third country should happen to go different ways, the conditions for equivalence would fall. This means that equivalence may be changed or withdrawn.”

Chances of a bespoke deal becoming less likely

Mr Dombrovskis said that, post-Brexit, the EU would expect its supervisors to sit alongside UK regulators on panels overseeing cross-border activities, adding the European Commission had put forward proposals for EU authorities to have “greater responsibility for monitoring the situation in equivalent third countries” – which would include the UK after Brexit.The Financial Times reported, “There are now questions as to what takes the place of passporting. City firms have hoped that there will be mutual recognition of each other’s rules through a bespoke deal.“Equivalence is the legal mechanism by which the EU allows access in certain circumstances to financial firms from countries beyond the bloc. But it is patchy, unilateral, and can be withdrawn at any time.“UK policymakers and regulators have instead pushed the idea of ‘super-equivalence’ or ‘equivalence of outcomes’, where UK firms could retain access to the single market as long as UK and EU regulations broadly tracked each other in their objectives, rather than being identical on paper.” 

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Find out more about the impact of Brexit on the financial sector in the Spring issue of our magazine 

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