UK Treasury will prioritise Brexit equivalence for financial services

The UK's Treasury has confirmed it is prioritising equivalence arrangements for financial services with regimes currently covered by EU regulation, to ensure a smooth exit at the end of the Brexit transition period.

In a letter (4 page / 84KB PDF) to the House of Lords EU Financial Affairs Sub-Committee on financial services after Brexit, economic secretary to the Treasury, John Glen, said work was continuing with the EU to assess equivalence.

Glen said successfully concluding equivalence assessments would be in the UK and EU’s mutual interest, adding that the Treasury could “see no reason why the UK and EU will not be able to find each other equivalent across all existing equivalence regimes”.

Glen said he agreed with the committee that the future relationship between the EU and UK must reflect the importance of financial services to both economies. He said the government wanted to ensure there were “clear and coherent” structures in place in the event equivalence was withdrawn by either party.

“The UK will seek to ensure the transparency and stability of an equivalence-based relationship while not compromising its autonomous nature,” he said.

Financial services regulation expert Elizabeth Budd of Pinsent Masons, the law firm behind Out-Law, said there was an added focus on post-Brexit arrangements following the government’s confirmation to the EU that it would not seek an extension to the Brexit transition period.

“Whilst it may seem from a commercial perspective that the UK is equivalent to the EU in those areas covered by the various financial services related directives, to obtain that formal standard and have confidence that it will not be easily removed will require sensitive negotiation,” Budd said.

“John Glen also points out that the EU and UK will be autonomous in their ability to develop their own regulatory regimes which does raise the issue of eventual divergence, which would in turn bring equivalence back under the microscope,” Budd said.

The UK put in place a temporary permissions regime to allow EU firms to continue operating in the UK after Brexit. Glen said the onus was now on the EU to take action to mitigate risks of disruption to financial services after the end of the transition period.

“The UK is clearly open for business and through the temporary permissions regime has shown its willingness to maintain a smooth flow of business and to the extent that it is within the UK government’s gift it seems clear that this approach will continue,” Budd said.

“Firms who need to be able to do cross border deals and services need to understand what equivalence will actually achieve for them. As we know it only provides a patchwork of cover and even with equivalence it will not be ‘business as usual’,” Budd said.

“Many firms have already done their Brexit planning but a surprising number of firms still do not have a clear understanding of what it will mean on a day to day basis. Firms also need to understand what a worst-case scenario looks like if equivalence is not implemented,” Budd said.

Glen said the UK and EU had a common interest in establishing a relationship on financial services based on mutual trust and cooperation. He also agreed with the committee that the government should take the opportunity after Brexit to develop closer bilateral relations with jurisdictions with which it shared a common approach to promoting cross border financial services.

The Treasury letter to the committee followed a letter addressed to chancellor Rishi Sunak (25 page / 497KB PDF) at the end of March, in which the committee set out its key conclusions from its inquiry and said it was concerned the EU’s equivalence decisions could be politicised and withdrawn at very short notice.