UK financiers’ hopes for EU ‘equivalence’ dim after Swiss debacle

8 January 2018 9:55am
EU UK Flags

5 January 2018. By John Rega.

British financial companies are back to pinning their hopes for EU access on the idea of maintaining equivalent rules at home after Brexit.

Since the British government ruled out staying in the EU’s single market, financiers have hoped for a special deal to allow cross-border business after March 2019. That would give more certainty than simply applying European rules and hoping to be admitted as guests.

UK Brexit minister David Davis still espouses the idea of bringing financial services into this year’s talks on future relations.

But Michel Barnier, the European Commission’s negotiator, played down those chances in a Dec. 20 news conference. While Barnier had advocated as much in US trade talks, he alluded to how the notion went nowhere with the Americans, and said the EU has never struck a free-trade deal covering finance.

The former commissioner and French minister might be bluffing, or merely reflecting the state of his mandate from EU leaders. They could turn receptive if the UK puts together an offer. Yet, as things stand now, there’s little movement toward a free-finance deal.

This sets UK financial businesses back to the prospect of petitioning the EU to let them in, based on having “equivalence” of rules. Otherwise they must set up shop in one of the 27 countries, answering fully to local regulators.

‘Equivalence’ doctrine

The EU has 16 laws in the financial sphere that let outside firms do business in Europe, if they come from countries with equivalent rules. The measures cover aspects of banking, investment management, exchanges, clearinghouses, insurers, auditors, credit rating agencies, data businesses and more. The commission has opened the doors this way to at least 34 countries, in various industries, such as Japanese accountants, Canadian banks and US stock markets.

Conditions vary across EU legislation, such as a reciprocal-access rule for derivatives clearing, or a review of supervisory practices at home for companies that administer financial benchmarks.

The UK already knows that it faces the toughest scrutiny. In a February policy paper, the commission set out a doctrine of heightening on national industries with the greatest impact in the EU.

That bad bit of news has since grown worse. Last month, around when Barnier was casting doubt on the idea of a financial-services deal, the commission’s leaders were introducing a type of political brinkmanship into an equivalence ruling for another neighboring market: Switzerland.

Commission staff had already proposed to recognize Swiss stock exchanges as operating in line with the revised Markets in Financial Instruments Directive. Equivalence with Mifid II lets EU traders buy and sell there, for shares that are also listed on markets in the bloc.

Swiss whiplash

With markets counting down to the Jan. 3 start of the law, commission President Jean-Claude Juncker pulled back the unconditional proposal. Instead, Switzerland was given a reprieve of one year.

Any renewal, the commission said, would depend on the Swiss government making progress in negotiations on its broader relationship with the EU.

The commission had granted provisional or time-limiting findings before. Yet, those were for countries on a path to adopting similar rules — a favor, not a punishment. For example, the EU executive granted a decade-long recognition to insurance rules in Bermuda, the US, Canada, Mexico, Brazil and Australia, all in a bid to keep them moving toward Europe’s approach.

The tougher-scrutiny doctrine from February still couched equivalence policy in terms of rules and practice. The Swiss case turned the process into a form of leverage for other objectives.

Other times when politics has filtered into equivalence decisions, it has tended to push in favor, overcoming some technical objections, such as with the US on credit ratings agencies.

Swiss leaders reacted with anger, although EU traders might have more to lose.

Aligning interests

Without the equivalence recognition, EU firms would have to pay brokers to access the SIX Group exchange in Zurich, or else trade stocks of companies such as UBS Group and Zurich Insurance Group on other markets with less activity. That usually means worse prices.

That dynamic could arise again with equivalence matters in the UK.

Financial companies from all around the EU have set up operations in London, often for serving customers back on the continent. European industrialists also come to Britain for financing and risk-hedging.

Yet the alignment of interest didn’t head off the problem for Swiss exchanges. Consider, that’s in a neighbor recently seeking more integration with the EU, notwithstanding the Alpine nation’s referendum vote to curb immigration. The political risks for a hostile Britain could be worse.

In Brexit talks, financial executives are mainly seeking to avoid the sort of politically driven uncertainty that has hit Switzerland.

Equivalence has been seen as a last resort, in the absence of a trade deal. Now it’s an even less attractive one.

Fintech Regulation in 2018