The U.K.'s aim of winning 'equivalent' status from the European Union for its financial services after Brexit has received a boost from Europe's leading wholesale financial markets body.
The Association for Financial Markets in Europe, or AFME, said the bloc should make sure any deal on equivalence between the EU and an external, so-called third country cannot be abruptly canceled and should not require line-by-line agreement.
After Brexit, the U.K. will be a third country and its financial companies will lose passporting rights, which currently allow U.K. firms to trade across the EU under the supervision of British regulators.
U.K. Prime Minister Boris Johnson wants financial services included in discussions over a free trade agreement with the EU.
Source: AP Photo
The U.K. is aiming for an equivalence deal with the EU over financial services in its post-Brexit arrangements but British financial services companies have been concerned that the EU's existing equivalence process is neither transparent nor does it provide certainty over how long an agreement on equivalence might last. The EU has equivalence agreements with more than 30 countries but its agreements can be unilaterally withdrawn at short notice.
Indeed, the EU acted in such a way with Switzerland when it ended an agreement on equivalence abruptly, while the EU commissioner in charge of that process indicated that its dealings with the country would serve as an example to the U.K. The AFME said the lack of communication around the EU's decision over Switzerland led to "significant uncertainty" for the market.
The AFME said decisions on equivalence should be made on the basis of an alignment of regulatory and supervisory outcomes between the EU's regime and that of the other party.
"It is therefore important to maintain an outcomes-based approach, ensuring that the outcomes are respected while avoiding excessively rigid approaches which could undermine the overarching objectives of equivalence," said the AFME.
This is in line with the U.K.'s desire for a so-called outcomes-based deal on equivalence rather than one based on line-by-line analysis of rules.
Oliver Moullin, managing director at AFME, said: "It is important to ensure continued close connectivity between the EU and international capital markets. Relationships with third countries should be further strengthened including through improving the transparency and certainty of the equivalence process and further enhancing regulatory and supervisory cooperation with third country authorities."
Free trade deal
The AFME paper lends comfort to U.K. Prime Minister Boris Johnson's expressed wish that financial services be included in discussions over a free trade agreement, which will begin formally when the U.K. quits the EU on Jan. 31. The AFME said agreements over equivalence could, in future, be supplemented through a free trade agreement or other formal relationship between the EU and the other party, noting that limited arrangements for financial services had been incorporated in recent free trade agreements struck between the EU and Canada and Japan.
At the moment, the future of any financial services agreement between the EU and the U.K. is covered by the political declaration accompanying the Brexit deal that outlines future intentions for relations on a range of issues but is not legally binding. The political declaration commits both sides to aim to get all negotiations completed by Dec. 31, though the European Commission President Ursula von der Leyen has now said it would be "impossible" to reach a full deal in that time.
The AFME said although its report does not address the future relationship between the U.K. and the EU, it had been published "in the context" of the U.K.'s prospective departure.
Bank of England Governor Mark Carney recently called for the British government not to make any compromises on financial services in its future agreement with the EU.
He said in an interview with the Financial Times that it was not desirable for the U.K. to tie its hands and outsource and supervision of the "world's leading complex financial system to another jurisdiction."