Best for the EU, Best for Britain – An Enhanced Equivalence Deal for Financial Services

New Report Outlines the Basis for an EU-UK ‘Win-Win’

As the EU and UK trade negotiations move up a gear, the focus is on the financial sector. UK’s Chancellor says Britain intends that a financial services agreement based on ‘enhanced equivalence’ should be part of a final UK-EU trade deal.

How would enhanced equivalence work?

In EU-UK Financial Services After Brexit: Enhanced Equivalence – A Win-Win Proposition, Barnabas Reynolds, one of the UK’s leading city lawyers, explains the basis in a joint New Direction-Politeia publication to be launched on Wednesday the 28th of February.

Already aspects of US-EU financial services trade take place on an ‘equivalence’ basis. To put it simply, trade in a number of areas is based on the respective financial sector laws being ‘equivalent’. The laws allow equivalence ‘determinations’ to be made for various activities. An EU-UK deal would, therefore, build on what is already there but go further to cover additional activities in the UK’s financial sector in a more predictable way.

Such a deal would bring friction-free access, allow EU partners to benefit from the services and capital markets in London, and the UK to trade freely in the EU market.  Reynolds, who heads his firm’s financial advisory and regulatory EU and global practice, indicates it would be a win-win arrangement for each.  Moreover, the EU would continue its role with the UK as a leading player in shaping the sector’s regulation globally.

The author also sets out detailed proposals for the legal framework for each party, providing both the UK and EU negotiating teams with the draft regulations ready-made. These include the following: 

·            A comprehensive draft EU regulation  

·              Detailed UK implementation measures

·              A bilateral UK-EU deal

These draft regulations could be used as a basis for discussion ready to be developed in the talks, to take account of preferences and options, and allow for negotiations and each partner’s different ways of doing things. Proceeding in this way would allow the EU and UK to work to mutual advantage to gain access to each other’s financial sectors, promoting two-way, trouble-free access between the bloc and the UK.

The benefits would be mutual:       

·          For the EU: EU firms could have friction-free access to the deep pools of capital and diverse services in London, with its international reach and global and domestic customer base.  

·          For the UK, UK-located global firms could have friction-free access to clients across the EU.       

·         For both, there would be greater predictability and certainty and the opportunity to build on existing business models.      

Businesses in the EU or London would not have to establish satellites in the EU, nor would EU customers face higher prices to pay for these via higher costs for capital, pensions, insurance, and other investments.

EU and UK businesses would have free access to each other’s financial sectors with two-way, trouble-free access between their respective financial sectors. Taxpayers would be protected against liability and the sector against systemic risk.  Costs would be curbed for EU businesses using London’s capital and services. Meanwhile, the competitiveness of the UK would be enhanced with more focused rules that conform to agreed standards.  Future cooperation on UK-EU regulatory arrangements would be facilitated 

The deal would be a winning deal for each.

If EU negotiators refuse to engage, London could become its own free standing centre, following international law but moving more rapidly to a competitive pro-business regime, with a slimmer rule book ready to attract new businesses from the EU and worldwide. Many are keen to exploit London’s pole position for the financial markets in European time zones and to enhance their concentrations of liquidity here. That model, however, would be less good for the EU than enhanced equivalence, which would give EU businesses and customers the stability and continuity of the present free trade arrangements and the advantages of operating in London, but without the costs and complications of restructuring. 

The Author

Barnabas Reynolds is an EU and UK regulatory lawyer and Head of Financial Institutions Advisory & Financial Regulatory Group at Shearman and Sterling. He is the author of ‘The UK Global Financial Services and the EU – Next Steps for Common Brexit Benefits’ in How to Leave the EU: What’s Best for Britain, Best for the EU? (2017) and The Art of the No Deal: How Best to Navigate Brexit for Financial Services (2017).


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