Potential influx of financial firms from EU could reduce UK reliance on equivalence

If an increasing number of financial companies choose to set up offices in the UK post-Brexit — as new data from the London-based Financial Conduct Authority suggest — the country might be able to go its own way on rules without fears the EU will shut off access to customers in the bloc.

The agreed system for the City of London to maintain market access to the EU post-Brexit is via equivalence, but the unilateral regime means Brussels could shut the UK out with just 30 days' notice if it thinks its rules are diverging too far from the EU's — an increasing likelihood as UK Chancellor Sajid Javid insisted over the weekend that the country would not be a "rule-taker" after Brexit.

But with more than 1,000 asset managers, insurers, exchanges and others potentially planning to set up an office in the UK after Brexit, the UK could be less reliant on equivalence and maintaining similar rules to those from Brussels by encouraging companies to set up shop in London.

Data obtained under a freedom of information request to the FCA, and seen by MLex, show that more than 1,400 EU-based companies have applied for the temporary permissions regime — a fallback provided for by UK financial regulators to mitigate the potential cliff-edge risk, for a maximum of three years, of the passporting regime suddenly falling away.

Of that number, more than 1,000 might need to establish an office in the UK, as they are using the EU's passporting regime for services, said Bovill, the consultancy that first requested the data from the FCA. A "services" passport means the company does not currently have a branch in the UK.

Passporting allows a financial services company approved to operate in one member state to freely do business throughout the bloc without setting up a separate corporation. That will no longer apply to the UK after Brexit.

"If all the firms who have applied in the temporary permissions regime decide they will become authorized here or feel they have no alternative but to do so because [Brexit] negotiations aren't going well ... firms will have arrangements in place that means there is less need for equivalence," said Ed O'Bree, a partner at Bovill.

Equivalence is a patchy regime, absent from many pieces of legislation and ignoring insurance and mortgage lending, for example. While the European Commission does not explicitly insist on a line-by-line assessment of another country's rules for it to achieve equivalence, in practice politics has often got in the way of a successful determination or renewal.

— Legal headaches —

But regulation doesn't operate in a vacuum, and legal headaches are likely to arise depending on how serious EU companies are about setting up an office in the UK.

For one, there's little time to open a fully fledged London operation between now and the planned end of the transition period at the end of 2020.

And regulation can bite away from home. For example, the EU's capital requirement rules impose strict capital penalties on European banks clearing through a non-EU clearinghouse that has not been given certain approval, even if those banks are operating through a subsidiary and legally are able to use the clearinghouse.

Movement away from the UK onto the continent has taken place and will likely continue to do so after Brexit. Many large investment banks have chosen Dublin, Frankfurt or Paris as homes for their new offices to ensure seamless trading can continue in the EU.

UK-based financial services companies vehemently oppose any plan to tear up the existing rulebook and are generally in favor of the prevailing regulation. Calls for tweaks are mostly limited, but examples include the insurance rules Solvency II or bonus-cap rules.