LONDON (Reuters) - Britain and the European Union are close to a deal giving UK-based financial services firms basic access to the bloc’s markets after Brexit, a British official said.
The deal would be based around the EU’s existing system of financial market access known as equivalence - which officials in Brussels have said all along is the best arrangement that Britain can expect.
The EU grants foreign financial firms market access if it deems their home rules “equivalent”, or aligned closely enough with the bloc’s own rules.
It means that foreign firms such as banks and clearing houses can serve EU customers largely from their home base and avoid having to spend large amounts of money setting up a subsidiary in the EU.
The EU has granted equivalence to financial firms from many countries, including the United States, Japan and Singapore.
No. Currently, inside the EU, all financial firms in Britain have unfettered access to the bloc’s customers, and the City of London has been hoping this would continue after Brexit.
But not all financial services are covered by equivalence. The EU has no such regime for major activities including commercial bank lending and parts of the insurance sector.
Equivalence largely focuses on the wholesale market such as securities trading, leaving out much of the retail sector. That is why many banks and insurers based in Britain have pushed ahead with opening new EU hubs to avoid losing customers.
If a deal does come about, it would be a major step forward for Britain.
For bankers, equivalence is better than no access at all as it could mean shifting fewer jobs and activities to EU hubs, and continuing to centralize some back office operations such as booking trades at global centers in London.
Normally, the EU won’t grant equivalence to foreign firms until it has completed a lengthy deliberations - about four years in the case of one U.S. derivatives clearing rule.
A deal that acknowledges equivalence ahead of Britain becoming a “third country” would dramatically speed things up, and early notice that it will still have even basic access to the EU would help maintain London’s position as a global base for banks.
WHAT’S A RULE-TAKER?
There could be some political fallout from a deal.
Backers of Brexit say that leaving the EU gives Britain a golden opportunity to ditch EU financial rules such as curbs on banker bonuses in order to keep the City competitive as a global financial hub. They fear that, under equivalence, Britain will end up as a rule-taker - having, like Norway, to cut and paste EU regulations into national law without having a say.
British financial regulators have said they want to stay aligned with EU rules but be granted some flexibility to make changes when it comes to maintaining financial stability.
DIDN’T BRITAIN SAY EQUIVALENCE IS A NON-STARTER?
Yes. Government ministers have said that the current equivalence system is opaque and unreliable because all decisions are made unilaterally by Brussels, and can be scrapped at 30 days’ notice.
But Britain is looking for enhancements to the system, such as a significantly longer notice period - a year or two - along with a mechanism for resolving disputes if rules on one side begin to diverge from the other.
ISN’T THE EU ALREADY MAKING CHANGES TO ITS EQUIVALENCE?
Yes, but not in the way Britain wants.
Faced with having to continue relying on a foreign financial center from next March, the bloc - and France in particular - is keen to tighten conditions for granting equivalence in order to keep up the pressure on UK-based firms to shift operations to the EU and help it build up its own capital market.
Foreign clearing houses - London dominates clearing of euro-denominated derivatives - will have to grant EU regulators access to their inner workings if they want to serve the bloc’s customers. Foreign investment banks face having to have more operations and capital in the bloc.
On the bright side for Britain, the scope of equivalence was substantially increased in January when the EU updated its “MiFID II” securities and investment rules, letting banks and investment firms from outside the bloc undertake a wider range of investment and trading activities.
Reporting by Huw Jones; editing by John Stonestreet