On 27 January 2020, the Department for Exiting the European Union (DExEU) published a letter from John Glen, the Economic Secretary to the Treasury, to Lord Kinnoull, European Union Committee Chair, on equivalence in financial services in light of the UK’s pending withdrawal from the EU.

The letter was issued in response to Lord Kinnoull’s letter on 30 October 2019, which highlighted the European Commission’s adoption of temporary equivalence decisions for the UK under the European Market Infrastructure Regulation on central counterparties and the Central Securities Depositories Regulation on central securities depositories, both of which were intended to mitigate concerns around financial stability and market integrity in the EU.

An equivalence regime, broadly, is a mechanism whereby one trading partner recognises as equivalent the standards and enforcement of another as equivalent to their own legal and regulatory standards. It has been used by the EU to grant and secure market access agreements with a number of third country jurisdictions, including the USA and Japan. In practice, an equivalence decision allows a foreign firm to serve EU customers primarily from their home base and avoid the need to set up an EU subsidiary. In the EU equivalence decisions are taken by the EU Commission, usually with technical advice from EU level supervisory bodies such as the EBA, ESMA and EIOPA.

In the correspondence, Mr. Glen stressed that the UK’s ambition is for a “deep and comprehensive” future relationship with the EU which “respects the autonomy of both parties”, while providing confidence and protecting financial stability.

Mr. Glen reiterated the UK’s commitment set out in the Political Declaration to seek equivalence across all of the EU’s equivalence regimes (approximately 40), with the relevant assessments of both the UK and EU expected to conclude by the end of June 2020.

Notably, Mr. Glen observed that, following Brexit, the UK will not be required to follow the EU’s exercise of equivalence determinations and could, for example, make an equivalence decision for a third country when the EU had not. In this respect he highlighted that the equivalence process will be “one of the key tools to facilitate cross-border financial services activity in the UK” and it “will be for the (UK) Government to decide how to exercise this in the UK’s interest.”

The procedures for equivalence decisions to come into UK law is set out in The Equivalence Determinations for Financial Services and Miscellaneous Provisions (Amendment etc) (EU Exit) Regulations 2019. Following Brexit, the European Commission’s responsibility for assessing equivalence in relation to financial services will be transferred to HM Treasury, with technical advice on equivalence decisions to be provided to the Treasury by the Bank of England, the PRA and the FCA.

There are a number of practical challenges associated with relying solely on equivalence recognition to secure market access in a post-Brexit environment. In particular, the fact that there is no uniform process for assessing equivalence under different financial service regimes as well as the lack of transparency and potential politicisation associated with such decisions (by way of illustration on the same day the letter was published the Irish Taoiseach suggested that granting access to its fishing waters could be a price the UK would need to pay for financial services access).

In addition, it is important to note that certain types of services, such as payment services and deposit taking, do not enjoy equivalence regimes under existing EU legislation.

Accordingly, whether the UK is recognised as equivalent in each regime within the suggested timeframe, the extent to which such equivalence decisions compensate for the loss of more extensive passporting rights in the aftermath of Brexit, as well as any future UK divergence from EU policy on third country recognition remains to be seen.