Market split on Commission’s equivalence threat

Author: Tom Young | Published: 10 Nov 2016
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London’s leading financial services lawyers are split over the significance of the European Commission’s stated plans to overhaul its equivalence framework.

The Commission’s off-the-record comments made in the Financial Times on Monday suggested that officials are re-examining existing equivalence rules, with an eye to strengthening the approval process so it is more rigorous for systemically relevant jurisdictions. One senior official said: “EU equivalence is not automatic and is not a right.” The move would likely damage the UK’s chances of accessing the single market through reciprocity.

Simon Gleeson, partner at Clifford Chance in London argues that the Commission’s comments are correct and that equivalence mechanisms were not drafted for Brexit. “I get where the Commission is coming from and I don’t think it’s political bloody mindedness,” he said.

Equivalence offers market access to groups based in countries that can show that their financial sector regulation is as tough as that of Europe. The possibility is set out in various pieces of EU regulation governing financial trading. Many in the industry have been hopeful of employing equivalence to side-step market access concerns once Britain leaves the EU.

Gleeson believes that the original purpose of the equivalence regime was to try to create a carrot and stick approach to encourage non-EU regimes to adopt EU-equivalent law. “And it is a million miles away from what some of the UK folk want to use equivalence for today,” he said.


  • London’s leading financial services regulatory partners are split over the significance of the EC’s stated plans to overhaul its equivalence framework;
  • Some believe that the equivalence provisions do need overhauling, and are not fit for purpose in the context of Brexit;
  • Others view the comments as political manoeuvring, with the Commission looking to gain a strong position ahead of the formal Brexit negotiations;
  • Debate also surrounds the longer-term issue of dynamic state equivalence, and the possibility that UK and US rules will diverge further from the EU’s leaving equivalence impossible to maintain.

Others disagree. “I don’t think these comments change anything,” said Barney Reynolds, partner at Shearman & Sterling in London.

Reynolds has high hopes for equivalence provisions.  Last week he published a ‘Blueprint for Brexit’ whitepaper, which sets out the various models available to the UK’s financial markets in light of Brexit. One option suggested by Reynolds is a so-called expanded equivalence model.

This would involve a direct, bilateral agreement with a commitment to include third-country equivalence regimes in all future financial services regulation in the UK and EU.

Simon Gleeson
Simon Gleeson, Clifford Chance

According to the paper, the success of expanded equivalence is also predicated on the de-politicisation of the process, both at the time of Brexit and following it – something that, on the face of it, looks less likely following the Commission’s off-the-record comments this week.

“Of course the European Commission is manoeuvring politically so as to give itself the maximum discretion and leverage,” he said. “The timing of these comments and the language used could be read as meaning equivalence is going to be very difficult to achieve.”

German MEP Markus Ferber appears to back up Reynolds’s view, telling IFLR this week that he believed the UK’s desire for single market access was being used as a bargaining chip ahead of the formal process.

Jonathan Herbst, global head of Norton Rose’s financial services practice believes equivalence can still be a valid model for market access, but it won’t be easy. “There is going to be a negotiation and there is going to be an element of technical analysis in there, along with a bit of politics. That is the reality,” he said.

Industry plans

The partners also disagree on how much hope the UK’s financial services industry is investing in equivalence as a viable plan. “I think there is a fairly broad feeling among banks and regulators that equivalence as currently set out in the directives is not a way forward,” said Gleeson, whose comments echo those he made before the UK’s EU Financial Affairs Sub-Committee in September.

Herbst believes firms are assessing it though. “Each bank, broker or asset manager is having to analyse its exact business footprint. So depending on who you are, equivalence may or may not be of any use,” he said. Retail brokers, for instance, do not currently have an equivalence mechanism, and even for those in the sector that do, Herbst believes equivalence is only a part of their scenario planning.

Dynamic state equivalence

Aside from the immediate question of whether the Commission will change its equivalence framework to complicate Britain’s access rights is the longer-term issue of so-called dynamic state equivalence.

The question centres on whether the diverging statuses of the UK's and EU’s capital markets will make continued equivalence impossible.

Many believe that the likely fragmentation of capital markets post-Brexit will lead to only two major securities markets: the UK and the US. Gleeson thinks the two markets’ regulators will talk more closely with one another and that the UK will likely continue to progress its regulation to address what it perceives as new requirements.

“Without a capital market, it is unlikely the same will happen in the EU,” said Gleeson. This could lead to a relatively rapid divergence between the UK and EU. “Not because Europe is moving anywhere but because the UK will continue to move and the EU is likely to stop,” he added.

“The UK authorities cannot tolerate the idea that they need to introduce certain rules that would improve the UK market and are prevented from doing so because Europe is not making similar rules, but they need to preserve equivalence,” he added.

Herbst disagrees. “I don't subscribe to the theory that we will end up with a US and UK bloc versus the EU,” he said. He believes that for a reasonable period UK regulation will map into European regulation. “There will be certain areas where perhaps it will begin to diverge, but that is subject to the equivalence discussion.”

See also

German MEP: UK equivalence will be ‘poor and burdensome’
UK passporting fears realised on Brexit vote