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Brexit and Enhanced Equivalence: a good deal for financial institutions?

Brexit and Enhanced Equivalence: a good deal for financial institutions?

  • United Kingdom
  • Brexit
  • Financial services and markets regulation
  • Financial institutions


Following the Cabinet meeting at Chequers, HM Government published its much trailed White Paper on 12th July setting out its vision of the future relationship between the United Kingdom and the European Union.

The White Paper sets out the proposed position across the whole relationship but does give details of the proposals for financial services.

The new proposals are an evolution of the solution put forward by Philip Hammond and Theresa May earlier in the year, when they floated the idea of a mutual recognition regime for financial services. The mutual recognition proposal was based on a reciprocal regulatory equivalence model which is objectively assessed with proper governance structures, dispute resolution mechanisms and sensible notice periods.

The Chancellor then set out three principles for the basis of free trade in financial services:

• Mutual recognition of regulations based on close co-operation in the framing of regulation, the scope of which regulation should be at least as extensive as it is today. The model focused on equivalent regulatory outcomes and agreeing acceptable rule changes where possible. The proposal did envisage that the rules could develop and evolve differently.

• Close supervisory co-operation, essentially as close as it is currently save, that the EU would no longer have a role in determining the UK's internal governance and vice versa.

• An arbitration mechanism by which future divergence can be managed in a way that allows certainty for participants in the financial services markets.

The proposal mooted in the White Paper is based on the third country equivalence regimes which are currently in place under various EU Directives and Regulations, such as MiFID 2 and EMIR.

The White Paper , however, argues that the current regimes are not sufficient to deal with third countries whose financial markets are extremely interconnected with the EU such as the UK. The UK proposal therefore envisages an extended equivalence regime covering a broader range of financial services than currently.

The basics would be that each party would have autonomy over decisions relating to access to its own market with a bilateral framework of treaty based commitments to underpin the operation of the relationship and to promote cooperation. There would be a reciprocal recognition of equivalence under all existing third country regimes in place at the end of the implementation period given that the UK and the EU are currently in the position of having identical rules.

Determining future equivalence should involve a three-limb test, although, ultimately each party would have discretion to decide that there is no equivalence.

Common principles for governance of the relationship

The basis for the equivalence determination would be an evidence-based judgement on whether or not there is an equivalent (but not necessarily the same or equal) outcome achieved by the relevant supervisory and regulatory systems.


The EU and the UK would have an intention to avoid adopting regulations which produce divergent outcomes in relation to cross-border financial services.


There should be common objectives such as preserving regulatory compatibility, financial stability etc.

Extensive supervisory cooperation and regulatory dialogue

There should be an overall framework  supporting collaboration and dialogue between regulators.


To maintain equivalence over the longer term the UK and EU should be able to comment on each other’s regulatory proposals at a political and technical level.


There would also need to be close supervisory co-operation in relation to firms which pose systemic risk or provide significant cross-border services on the basis of equivalence.


The suggestion is that there will be reciprocal participation in supervisory colleges which bring together regulatory authorities involved in supervision of banks and financial institutions.


Predictable transparent and robust processes.

Agreement would be required on transparent processes for assessing equivalence which are based on clear and common objectives and which may include expert panels.


Some suggestions are put forward for what may happen if a party wishes to withdraw an equivalence determination.  This may include an initial grace period to maintain or restore equivalence, clear timelines and notice periods and also safeguards for acquired rights to avoid risks to financial stability or investor protection.


The White Paper also proposes a presumption against unilateral changes that narrow the terms of existing market access regimes unless absolutely required.

The next steps envisaged by the White Paper are finalising the Withdrawal Agreement and the future partnership agreement together as a package by October. This will be followed by debate on both UK Houses of Parliament and, if approved, implementation into UK law.


In proposing an equivalence model HMG has moved towards the Commission’s position, reflected in Michel Barnier’s speech of 10 July in New York at the European American Chamber of Commerce. He explained that the UK wanted the EU to accept UK standards, but that “the UK needs to understand that the EU cannot expect to accept UK standards by means of a system of mutual recognition.” He concluded that the equivalence system would work with the UK just as it does with the US, and the experience that the EU has from its regulatory dialogue with the US could be built on with the UK.

The White Paper, however, acknowledges that reliance on the current equivalence regimes fail to provide sufficiently comprehensive cover. Indeed, talk of “an equivalence regime has always been inaccurate and belied the fact that some financial services providers, such as private fund and asset managers, are well served under the current regimes, i.e. AIFMD and MiFID 2. Others, however, are not so well provided for (e.g. banks with no third country equivalence regime existing for this country credit institutions under the CRD, CRR or elsewhere).

Moreover, on the application of the current EU equivalence regimes: given the size of the exposure which the UK financial system has to those in the EU, it is difficult to see how an EU equivalence determination could be made without the Commission requiring the UK rules to be equal. Initially, this would likely be straightforward but the UK’s freedom to make any standards which diverge from EU standards would be brought into doubt. Given the political fall-out in the area of goods, this would be an unpalatable position for the UK government if extended in practice to financial services. Of course, under a no-deal scenario, this would also be the case as the third country regimes apply to all non-EU countries – not only to those with a special trade agreement.

Finally, questions around the content of rules can only be properly addressed if there are efficient processes for the promulgation, application and adjudication. In this respect, the recommendations for the participation in colleges and ongoing dialogue and debate in special fora is sensible and important. The EU will continue to have much to learn from the UK, given the size and importance of the UK international financial markets, and the UK will value interaction with EU bodies, given the importance of its relationship and more importantly that of UK based financial institutions, with the EU markets.

How Eversheds Sutherland can help

Since June 2016, our lawyers and consultants have advised various institutions passporting into the UK from EU27 Member States and passporting from the UK into the EU27 on Brexit planning and Brexit related issues.

We would be happy to discuss how we can help you with your Brexit planning and execution of those plans.



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