On 9 November the UK government announced plans “to bolster the dynamism, openness and competitiveness of the [UK financial services] sector”. These include measures relating to green finance, which are the subject of a blog post by Shona Hughes-Daly and Emma Rachmaninov, and plans for financial technology. They also include a package of equivalence decisions relating to the EU1 and guidance on the UK’s approach to equivalence generally, which are the subject of this note by Andrew Marsh.
A package of decisions regarding the EU
The UK intends to grant equivalence recognition to the EU states in a number of areas. The full list is set out below.
These decisions will recognise that the EU financial services regulatory and supervisory regime is equivalent to the UK’s, which will enable (or go some way towards enabling) EU market participants, and their UK clients and counterparties, to obtain more favourable treatment under the UK regulatory regime.
Equivalence has not been granted across the board: there are still outstanding areas where equivalence could be granted but which are not covered in this package. The government is not ruling out including these at a later stage.
This package will be welcomed by the UK financial services community. The UK’s strength in this sector has long been founded on openness to the rest of the world. Making these decisions now, on a unilateral basis, is itself a statement about the government’s continuing commitment to that openness. By making it easier for EU market participants to do business in the UK, and with UK clients and counterparties, they ensure the UK’s continuing attractiveness as a marketplace. They will also directly benefit the UK clients and counterparties of these firms by facilitating their access to these services and easing their regulatory obligations.
The EU has taken a very different approach. So far it has granted recognition to the UK only where it has seen it as necessary to ensure financial stability. This has resulted in just one, time-limited, equivalence decision to date, which enables EU firms to continue to use UK clearing houses. In a number of areas2, the EU has ruled out granting equivalence recognition in the short or medium term. In others, it is continuing to assess the case, giving as the main reason for its delay a lack of clarity about the future direction of the UK regulatory regime.
The UK’s equivalence decisions regarding the EU: the areas covered
The European Market Infrastructure Regulation (EMIR) Art. 13 – This is a partial decision in relation to the intragroup exemption from the clearing obligation and OTC derivative margin requirements.
EMIR Art. 2A - This will enable UK firms to continue to treat derivatives traded on EU regulated markets as exchange-traded derivatives rather than OTC derivatives.
The Capital Requirements Regulation Arts. various – These will ensure UK firms will not be subject to increased capital requirements as a result of their EU State exposures.
The Solvency 2 Regulation Arts. 378, 379, 380 – This covers all three equivalence decisions including both reinsurance and group capital treatment.
The Central Securities Depositaries Regulation Art. 25 – This is a step towards enabling EU CSDs to continue to service UK securities.
The Benchmarks Regulation – This opens up ways in which EU benchmarks administrators may be able to provide benchmarks to supervised entities in the UK.
The Credit Rating Agencies Regulation Art. 5 – This facilitates the use in the UK of credit ratings issued by EU credit rating agencies.
The Short Selling Regulation Art. 17 – This makes EU market makers eligible to use the market maker exemption from certain short selling restrictions and reporting requirements.
Central Counterparties – This opens up the possibility of the Bank of England recognising EU central counterparties for clearing transactions entered into by UK firms.
Auditors – Audit equivalence will be granted to EU States.
It should be noted that, in many of these cases, the equivalence decision is not sufficient by itself to confer the relevant benefit – sometimes further institution-specific recognition is required from a UK regulator, or other further requirements apply. It is also important to note that, in some cases, the UK is putting in place transitional measures that will apply for a period following 31 December 2020 in any event.
The equivalence decisions listed above are in addition to the equivalence decisions previously made by the UK:
Prospectus Regulation Art. 29(3) – Recognition of prospectuses.
Transparency Directive Art. 23 – Various exemptions for issuers.
EU central banks – The central banks of EU States have been recognised for the purposes of various exemptions in financial services legislation.
The UK’s approach to equivalence decisions generally
Alongside this specific package relating to the EU, the government has also published a guidance document setting out its approach to making equivalence decisions generally.
The principles on which the UK’s approach will be based are as follows:
- facilitating an open and globally integrated financial system;
- equivalence to be assessed on the basis of outcomes;
- a transparent and evidence-based process;
- a cooperative process; and
- equivalence to be a stable and reliable arrangement.
Publication of this document now seems to have two purposes. First, and most obviously, it provides transparency regarding the way the UK will approach making equivalence decisions in future. The UK is effectively rolling over the vast majority of equivalence decisions already made by the EU regarding third countries. But over time it may want to make additional decisions, as well as keep under review decisions already made, and this paper explains how this will be done. In providing this transparency the government is giving tangible evidence of its commitment that the UK should remain “an open, attractive international financial centre”.
In addition to this, the guidance clearly has the future relationship with the EU in mind. The approach it outlines is one that the UK has long been pressing the EU to adopt also, so that the EU can make equivalence decisions that facilitate UK-EU business on a transparent, predictable and stable basis, without requiring the UK to be a rule-taker. The UK may hope that its unilateral adoption of this approach will encourage the EU to follow suit. But the EU – with a mighty competitor on its doorstep, and one which has vaunted its new-found control over its own regulatory regime – may well see things differently.
1: In this note references to the EU include the EEA states also (Iceland, Liechtenstein and Norway).
2: For example, recognition of prospectuses under Art. 29(3) of the Prospectus Regulation, and investment firms providing investment services to EU professional clients and eligible counterparties under Art. 47(1) of the Markets in Financial Instruments Regulation.