“Super-equivalence”: the Government’s proposed new approach to financial services after Brexit

A summary of the Government's proposed approach to financial services after Brexit.

On Thursday 12 July 2018, the Government published a White Paper on “The Future Relationship between the United Kingdom and the European Union”. This update looks at what is being proposed for financial services.

The paper contains considerable detail on goods, customs and security and importantly, it contains a proposal setting out a framework for the future of the UK/EU financial services relationship, although the level of detail is rather light.

Summary of proposed approach

There will be an end to the single market in services and passporting in its current form will cease.

The Government proposes to establish “new economic and regulatory arrangements” with the EU - akin to a form of “enhanced equivalence”.

Immediately after the end of the transitional period (the Government calls it the implementation period), the proposal is that a form of reciprocal recognition of equivalence under existing regimes by both the UK and the EU will take effect (as opposed to the autonomous third country equivalence regime which currently exists in the EU). The scope of the existing equivalence framework will expand, in recognition of the breadth and interconnectedness of UK-EU financial services provision. The hope is that equivalence would encompass a broader range of cross-border activities, although it would not be as extensive as the current passporting regime.

Decisions on whether and on what terms UK firms should have access to the EU’s markets would be a matter for the EU, and vice versa, thus respecting the regulatory autonomy of the UK and EU. However, the Government proposes that decisions would be implemented in line with agreed processes, and that provision is made for necessary consultation and collaboration. This would entail:

  • Common principles for the governance of the relationship: equivalence would require an evidence-based judgement of the equivalence of outcomes achieved by the respective regulatory and supervisory regimes. There would be a shared intention to avoid divergent outcomes in relation to cross-border financial services and the Government proposes setting common objectives, such as preserving regulatory compatibility and supporting collaboration to manage shared interests such as financial stability.

  • Extensive supervisory cooperation and regulatory dialogue: the UK proposes an overall framework that supports collaboration and dialogue. This means understanding and commenting on proposed regulation at an early stage through consultation at political and technical level, and close supervisory cooperation in relation to firms which pose a systemic risk or provide significant cross-border services. In particular, this would involve reciprocal participation in supervisory colleges.

  • Predictable, transparent and robust processes: the process for assessing equivalence should be based on clear and common objectives, making use of experts and proceeding in consultation with industry. Moreover, if equivalence were to be withdrawn, there would need to be an initial period of consultation on possible solutions to maintain equivalence, followed by clear timelines and notice periods. There would also be a process by which a party may indicate that it no longer seeks equivalence in a particular area. There would also be a presumption against unilateral changes that narrow the terms of existing market access regimes, other than in exceptional circumstances.

The UK also proposes a set of institutional arrangements to ensure that these processes (among others) function properly. At ministerial or head of state level, a Governing Body would be created to set the strategic direction for the future relationship and take decisions at the highest level. Beneath the Governing Body would sit the Joint Committee and appropriate sub-committees, which would enable officials to meet for detailed discussions, and would play a role in avoiding disputes between the UK and EU. If the Joint Committee cannot settle disputes, then they could be referred to an independent arbitration panel, which would include members from both the UK and EU.

What impact will these proposals have on financial services?

These proposals are unlikely to represent the final agreement between the UK and EU, if indeed agreement is reached at all. Assuming the EU is willing to consider a set of proposals which it might view as “cherry picking”, there will be a period of intense negotiation, in which the EU will no doubt seek concessions for giving the UK the form of enhanced equivalence it seeks. Depending on how the negotiations play out, possible alternative outcomes include equivalence as it exists today or something much closer to the internal market in services.

The current equivalence framework has some obvious holes, for example in relation to banking, and the negotiation of equivalence is frequently a time-consuming process. We would therefore anticipate a period where freedom to provide certain services into the EU is restricted whilst new equivalence decisions are being considered. Moreover, the assessment of an “equivalence of outcomes” is a far from easy process. Arguably the easiest way for the UK to demonstrate equivalence is to copy out EU law into its domestic legislation, and there may be considerable pressure to do so in areas where the UK has a strong interest in securing equivalence. Notwithstanding the institutional arrangements proposed by the UK, the assessment of equivalence in key areas will rarely be an entirely evidence-based process - the politics of the situation may also prove influential.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.