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Letter from Brussels: Brexit and equivalence

Nothing could be clearer. For the financial sector, at least, there is nothing to fear from Brexit. All the UK has to do is to apply to the EU’s rules – the crucial term ‘equivalence’. Nothing could be easier. And, to help reduce any anxiety, the Commission has recently drawn up its own staff working document, entitled, ‘Equivalence decisions taken by the European Commission’. There also exists a significantly more detailed study on the same subject from the European Parliament (PE 587.369). 

The Commission describes its paper as simply a stocktaking exercise. The modest document sets different categories of financial legislation against a list of various non-EU jurisdictions. ‘Y’ for yes in the appropriate boxes indicates equivalence. The Commission defines equivalence as whether a third country’s rules achieve the same regulatory or supervisory outcomes as do the EU’s. 

On details, when it comes to, say, legislation on credit rating agencies, there are nine boxes bearing the letter ‘Y’. They include blessings on Australia, Canada, Japan and Mexico. For prospectus rules, there are only four Ys. Many sets of legislation listed get effective zeroes. 

While the Parliament’s 12-page paper is aimed mainly at the banking sector, it also covers sectors relevant to pension management. For example, in the asset management field there is reference to the non-UCITs funds market involving professional clients. Here the answer to the question “Are there equivalence clauses?” is no.

But there is an explanation that: “Though not considered as an equivalence clause strictly speaking by the Commission, the AIFMD [The Alternative Investment Fund Managers Directive] offers the possibility of extending the passport to non-EU fund managers – based on ‘positive advice’ from the European Securities and Markets Authority (ESMA).” 

As for UCITS – EU-domiciled funds marketed across borders – the answer to the question, do they grant access to the single market (passport-like), the answer is a straight no. 

The insurance sector, under Solvency II, gets a yes to the first question, and yes, partially, to the second. The qualification is that if equivalence is granted, passport-like rights apply to insurance companies only. 

A second table investigates different articles in measures such as in MiFIR/EMIR, the Statutory Audit Directive and the Market Abuse Regulation. For the question on whether equivalence decisions have been taken, the answers are no in 30 cases, against only four yeses. 

Covering third-country venues for derivative trading, even the yeses are hardly likely to bring joy to interested parties in the UK. One indication applies to Art 38 in MIFIR for third-counties trading venues and CCPs. Parliament’s paper recognises that under EMIR access may be permitted. However, the yes answer is covered by another note, that “No equivalence decision has yet been adopted”. MiFIR and MIFID II enter into application in January 2018. 

Another ‘yes’ item applies to Art. 47 in MIFIR, on the subject of investment firms providing investment services to EU professional clients and eligible counterparties. Here a note explains that non-EU firms are able to provide cross-border services from outside the EU to professional clients and eligible counterparties established in the EU.  

The overall question now has to be, can the existence of two different papers from EU institutions on a subject critical to UK-EU Brexit negotiations be interpreted that Brussels is already gearing up to a tough position on the subject? Not necessarily. The preparation of the Commission’s staff working document can be seen as nothing more than routine. Attempts to read implications into the preparation of the documents would be mistaken. 

In other words, scenarios on how negotiations will emerge remain just that, scenarios. Could there be soft positions taken by both sides, resulting in amicable settlements in two years’ time? Perhaps? Or nightmarish wrangling achieving a crash landing with no common ground whatsoever? Could be.

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