Too little trust after Brexit for equivalence to work

21st April 2021

Written by

by Nick Smith

Why would you want to be the same as a competitor?  In any other walk of life – commerce, sport, romance, politics – we focus on differentiating ourselves.  While having parity can be helpful in some respects, what we do better than the other person is always more important.

While the UK was always a competitor while inside the EU, there was a framework to that competition.  Like when you fight with your siblings.  You may fight hard, and potentially not fairly, but know how far you can go.  Now that the UK has left the EU the rules are less clear, and more importantly both sides have strong incentives to compete with one another.

While the UK and EU currently adhere to many of the same financial services rules (many of which also bear UK fingerprints) this is not a stable equilibrium.  The announcement of a MoU for financial services regulatory co-operation doesn’t change this dynamic.

The EU is already undertaking significant reviews of its asset management framework and Solvency II.  The CRR is already being reformed to support the securitisation market and efforts to establish an effective Capital Markets Union are being redoubled in response to COVID and the UK’s departure.  As you may be aware, the UK has been quite clear that it sees Brexit as an opportunity to do things differently.

There is also little political trust between the UK and EU – an integral condition of any equivalence agreement.  It is unlikely that either side will resist the temptation to indulge in some political point scoring any time soon, or be prepared to take the hit that comes with perceived acquiescence.

Even usually collegiate regulators – a shared appreciation of working within political constraints can be a great bonding agent – are unlikely to ride to the rescue.  For both sides, equivalence doesn’t solve their biggest questions – how can we claim to be a global financial centre but not in charge of our own rules? How can we manage our economy when our main financial centre is located outside our jurisdiction?

Cross border financial institutions may dislike the additional cost and complexity this entails.  While there may have been one branch of history where equivalence or a more co-operative relationship was possible, we’re not in it.

These challenges are only likely to become more entrenched over time as and when either the EU or UK diverges from its current framework.  While the MoU may provide a small foundation on which greater co-operation can help manage this divergence and mitigate the risks involved, it is a very heavy burden to place on four pages of text.

Nick Smith is Chair of Labour in the City