UK-based financial institutions should not take it for granted that equivalence will be granted once the UK leaves the European Union and should bear in mind that not all EU directives have equivalence provisions, according to law firm Norton Rose Fulbright.

Leaving the EU means the UK could lose the ability to use the passport mechanism for accessing EU markets. Under a passport a firm’s authorisation to do business in one EU member state is recognised by all other member states, without the need to obtain a separate regulatory approval from each country. Passporting procedures depending on both the specific directive applies and the kind of passport that is being requested.

There are 23,532 passports into the UK from another EU states and 336,421 outbound from the UK according to letter from the Financial Conduct Authority to the UK parliament in August.

It is possible for firms outside the EU to be given permission to operate in the region, if they are deemed to be authorised in a country with equivalent regulatory standards by the European Commission, or in some cases, member states or their national regulators.

Norton Rose Fulbright warned in a note: “Whilst a number of important pieces of EU legislation contain equivalence provisions, some do not. For example, the Capital Requirements Directive IV does not contain equivalence provisions meaning that classic corporate banking – deposit taking and lending to companies – is not covered.”

The law firm added there are also no equivalence measures within the Ucits Directive which covers retail asset management.

“However, although an equivalence determination is a legal test the conclusion is fundamentally a political decision meaning that it cannot be taken for granted,” said Norton Rose Fulbright.

In addition, equivalence can be removed at short notice if national law changes and is judged not to match the EU. “In particular article 54 of MiFIR provides that third country firms shall be able to provide investment services and/or activities in member states in accordance with national regimes until three years after the Commission has adopted an equivalence decision,” added the law firm.

The UK will also continue to be a member of international bodies such as the Financial Stability Board, the G20 and the Basel Committee on Banking Supervision and so will need to carefully monitor how the EU translates their requirements into specific regulation.

“There appears to be emerging thinking in the market that the UK needs a bespoke arrangement with the EU and that the existing possible alternatives like the Norwegian model are not feasible. However, it is far from clear as to what this arrangement would look like,”added Norton Rose Fulbright. “Some have touted the idea of some sort of binding international arrangement that provides mutual rights of access.”

TheCityUK, the trade body, commissioned Oliver Wyman to estimate the impact of the UK’s exit from the EU and the consultancy published a report this week.

The report said the UK-based financial services sector earns between £190bn ($250bn) and £205bn in revenues each year, generates an estimated £60 to £67bn of taxes and contributes a trade surplus of £58bn to the UK’s balance of payments.

Oliver Wyman estimated that between 45% and 50% of total revenues come from domestic business with UK clients, 25% is international and wholesale business related to the EU and the remainder is non-EU international and wholesale business.

The report said losses would depend on the level of access given to the UK. The highest level would result in regulatory equivalence across a wide range of existing European legislation, together with new agreements for directives without equivalence provisions such as the CRD IV and the Insurance Distribution Directive. The lowest level would be no equivalence at all, which would significantly restrict the ability of UK firms to do business in the EU.

Oliver Wyman said financial institutions are currently planning their response for low and high access scenarios.

“Due to the long implementation timeframe, an absence of assurances from both the UK and the EU that there will be an orderly transition may lead them to start putting into action their contingency plans unnecessarily,” added the report. “The cost of doing so would, in large part, likely be passed on to customers.”

In order to leave the EU, the UK has to trigger article 50 and the timing is entirely in its own hands. Prime minister Theresa May has said this will happen by the end of March 2017. Negotiations for leaving the EU then need to be completed within two years.

Oliver Wyman warned that it is possible that the regulatory framework will not be finalised two years after triggering Article 50.

“Given the UK serves as the EU’s largest financial centre, this could have a large negative impact on financial stability, growth and competitiveness in the UK and the EU,” added Oliver Wyman. “In order to minimise this threat, a clear agreement will be needed on a transition period between the UK’s formal exit from the EU and the implementation of the new rules.”

A transition period of between three to five years would give financial firms time to changes their business models and avoid disruption in client service said the report.

More on Brexit: 

• Will Brexit Be Positive for UK Financial Services?
• Equivalency Discussions Key for Brexit
• Will Brexit Affect The City of London?