Michel Barnier, the EU’s chief negotiator, has dashed hopes of an EU-UK super-equivalence deal on financial services, post-Brexit. He recently said the UK cannot expect preferential access to EU financial services markets and will have to rely on patchy equivalence frameworks used by third countries such as the US. Mr Barnier added that the EU’s main financial centre cannot exist outside the EU for financial stability reasons.
These are early days in the negotiations, so positions could change. However, what Mr Barnier is proposing is basically a ‘hard Brexit’ for the City of London, implying that any free-trade deal would likely favour physical goods over services.
This is unwelcome for banks. It implies the balkanisation of bank capital – particularly for globally systemically important banks, which would have to split regulatory capital and risk functions between the UK and the EU. This would be costly and could also fragment Europe’s capital markets, driving them to seek economies of scale in New York instead and affecting areas such as clearing and over-the-counter derivatives.
Mr Barnier mentioned equivalence frameworks. These are available in a few areas, such as through the European market infrastructure regulation, the Alternative Investment Fund Managers Directive (AIFMD) and the Markets in Financial Instruments Directive (MiFID) II.
But even these texts do not provide much comfort; equivalence can be withdrawn at 30 days’ notice. Meanwhile, MiFID II measures are untested, and though some third countries are deemed equivalent under AIFMD, they have not yet been cleared to go. Indeed, the European Commission is looking to review the entire equivalence process, which has drawn some sharp rebukes from US regulators and created new uncertainties.
That leaves London-based bankers having to move some operations to the EU-27, while also looking at measures such as ‘reverse solicitation’ (whereby EU firms approach London banks of their own volition) and making use of regulatory differences within individual EU member states to conduct business legitimately.
