Equivalence Will Not Work Post-Brexit

Shanny Basar

Dr Kay Swinburne, MEP and vice chairman of the European Parliament’s economy and monetary affairs committee, warned that equivalence will not be suitable to allow mutual access to financial markets once the UK leaves the European Union.

After Brexit, the UK will lose the ability to passport financial services across the remaining EU 27 member states. One suggested alternative is to use the equivalence regime under which the European Commission can recognise that the regulatory or supervisory regime of certain non-EU countries is equivalent to the corresponding EU framework.

However Swinburne warned that equivalence will not work in a keynote speech at the AFME European Trading & Market Liquidity Conference in London today.

She said: “Equivalence is different in each piece of regulation, the process has become politicised and it can be withdrawn with 30 days notice which is not workable for global financial markets.”

Swinburne said the European Commission is working on improving the equivalence process, including giving a timeline for the process and explaining why regimes fail to be given equivalence.

“There is scope for a free trade agreement as regulations will be the same on the day the UK leaves EU,” she added. “This would be the world’s first free trade agreement that includes financial services.”

She explained that Michel Barnier, the European chief negotiator for Brexit, wrote the chapter on financial services which was included in the Transatlantic Trade and Investment Partnership was being discussed between the EU and the US, although TTIP failed to be adopted.

“The intention is to ensure regulatory alignment with the EU27, based on common objectives,” added Swinburne. “It will therefore involve forming a new regulatory forum as envisaged by then-Commissioner Barnier in which future regulatory actions can be discussed.”

The free trade agreement will need to include an arbitration system so that disagreements in policy can be explored in a technical process.

“Where conscious divergence takes place in terms of regulation, the opportunity to demonstrate why this is the most appropriate line of action for each market and to demonstrate how this adheres to the principles will be vital,” said Swinburne.

She also warned that post -Brexit there is a real danger of a break in trust between the UK and the EU, especially as there is a feeling that the UK will deregulate and become a “Singapore on the Thames” that will threaten and undermine Europe’s safety and competitiveness.

“This narrative is misplaced,” she added. “The UK has never adopted a low regulation approach, indeed we often gold plate regulation from Brussels and are the driving force within EU discussions advocating for higher standards – not just for financial services but for chemicals, pharmaceuticals, aviation and other highly regulated sectors.”

Swinburne continued that the recent regulatory proposals for EU oversight of third clearing houses has also led to a break in trust between the EU and the US.

“The US lack confidence in the EU’s ability to be proportionate and not apply a damaging blanket Brexit policy to all third countries,” she added. “It is causing huge concern currently and paves the way for retaliatory regulatory action.”

She noted that it took four years  to agree EU/US equivalence for CCPs and this is being jeopardised.

Xavier Rolet, former chief executive of the London Stock Exchange Group, commented:

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