The U.K. wants a deal with the European Union on mutual market access for financial services based on its regulations that provide the same outcomes as EU rules, but no longer on a bespoke "enhanced equivalence" arrangement, according to experts.
The deadline to reach agreement on assessing whether each other's financial systems are "equivalent" is June 30. There has been no update from either side on whether that deadline remains in place, but observers said an agreement by then looks unlikely.
The U.K. left the EU in January this year but under transition arrangements will continue to abide by EU rules until the end of this year, and it has ruled out extending transition arrangements.
"There is some sort of dialogue going on and both sides want a deal. The U.K. is no longer talking about 'enhanced equivalence' and the EU is no longer talking about a 'strict adherence' to the rules in a granular way. That is good news since it suggests both sides are actually prepared to compromise on previously stated positions," said David Henig, director of the U.K. Trade Policy Project at the European Centre for International Political Economy, a think tank, and a former U.K. government trade negotiator.
Henig said the talks are progressing, albeit slowly, and believes an agreement will be reached because it is in both sides' economic interest to do so.
Rishi Sunak, the U.K. chancellor, said earlier in June that comprehensive mutual findings of equivalence were in the interests of both parties, while the EU said equivalence assessments will have to consider future divergence between the two sides.
The U.K. has previously asked for an "enhanced equivalence" deal with the bloc. The EU currently has equivalence deals with dozens of jurisdictions worldwide, including the U.S. and Japan. Under these arrangements both sides' financial services are allowed direct access to each other's markets, operating under one set of regulations and under one supervisor because each agrees the other's financial regime is equivalent. But this arrangement can be ended unilaterally by the EU with just 30 days' notice and many sectors are not covered, including commercial banking, primary insurance, securities trading and corporate lending. An enhanced equivalence regime would cover more areas, an increased notice period and a mechanism for resolving disputes.
However, on June 23 the U.K. Treasury released a series of papers indicating how Britain's financial regime affecting banks, asset managers and derivative traders might change in future. While these stressed that the U.K.'s rules reflected existing EU and international standards, such as the Basel Accords on banking standards, Economic Secretary to the Treasury John Glen noted that the U.K. has now left the EU and would make its own decisions about regulation and there would be "changes to some of the details."
Professor Chris Grey of the Royal Holloway University of London, who has analyzed the effects of Brexit on business and trade, said the Treasury's papers indicated a significant change in direction by the U.K.
"The terminology on the U.K. side is 'outcomes based' now rather than 'enhanced equivalence' — though it is not clear whether that will fly with the EU," he said.
"Back in February when the U.K. outlined its plans for this, it was talking about equivalence arrangements like those between the EU and Japan, but enhanced. But now what is being talked about is not Japan but more in terms of conformity to international regulatory systems. That is a significant shift in emphasis, away from previous EU deals with countries to a reliance on international frameworks."
Professor Grey said the move away from direct comparison with other countries' equivalence regimes with the EU could make it easier for the EU to sign a deal with the U.K. Doing so would allow for the EU to claim such a deal was unique and thereby avoid the risk of upsetting existing equivalence partners.
"That move away from the claim of legitimacy for an equivalence deal by basing it on previous arrangements with other countries and instead focusing on adherence to international standards gives the EU a way out, if they want to take it," said Grey.
Though the deadline to conclude the assessment is nearing, the EU said June 26 that it had sent the U.K. a questionnaire in relation to the talks covering 28 different areas: "The U.K has not yet answered most of the questionnaires," said an EU spokesman.
Peter Bevan, global head of financial regulations at law firm Linklaters in London, said a deal based on a form of equivalence was still the most likely outcome.
"Based on Rishi Sunak's statement this week, the U.K. government still believes that a comprehensive agreement of mutual equivalence is their desired outcome. We also understand that the June deadline is not a hard date because equivalence could always be decided later as part of a wider package of agreements," he said.
View from Germany
The German banking association has called on the EU to prioritize equivalence in talks with the U.K., arguing such rules are vital to ensure financial stability for both sides. It calls for a financial services chapter to be inserted in a free trade agreement between the EU and the U.K., and said concrete market access solutions can be based on regulatory equivalence. But it warned that granting the U.K. more than a standard equivalence deal was fraught with difficulty.
"The EU would be giving up a lot if it moved away from its standard position if it granted the U.K. more privileges than the U.S. or Japan, for instance, because the U.K. is now a third country as they are. We do not want a cliff-edge scenario, it is important to ensure business can still be done across borders. We are reaching a critical point in the process and it is necessary to find a solution," said Kolja Gabriel, head of European and International Affairs at the Association of German Banks.