How Will London Financial Services be Regulated in the EU?
Post-Brexit trade relations are beginning to sort themselves out, but how the EU will regulate UK financial services remains unclear as the EU is still in the process of defining the new regulatory system. Mairead McGuinness told the European Parliament, “What we envisage for this framework is similar to what we have with the United States, a voluntary structure to compare regulatory initiatives, exchange views on international developments and discuss equivalence related issues”. The US and EU took nearly four years to agree on cross-border derivatives rules, so it is no wonder the EU will seek out a similar approach towards the UK.
The UK-EU’s Brexit deal does not cover financial services from the beginning of this year, which cuts off the City of London from the EU. From the first of January 2021, UK financial services firms lost their passporting rights. Passporting allowed firms to sell services to the EU from the UK without the need for extra regulations. Both parties are expected to create a financial regulatory forum that promotes cooperation by the end of March. However, official discussions have not begun yet, which is concerning. Further, trading in euro shares and a chunk in swaps have already left London. This leaves many questions unanswered regarding future EU access, considering banks and financial platforms from the UK now have units in the bloc.
McGuinness has also said regulatory cooperation was not about restoring market access that the UK lost or about constraining the EU’s unilateral equivalence process. Given the importance of equivalence for market access, the UK and the EU agreed last year to try to conclude their equivalence determinations by mid-2020. In November 2020, Finance Minister Rishi Sunak announced that the UK would be granting equivalence from the beginning of January 2021 to EEA-based financial services in areas like as credit ratings agencies and derivatives trading. The EU Commission has determined that future equivalence decisions in financial services are one of the measures that the EU can adopt within a wider set of “pillars of cooperation” with the EU.
The UK plans to carry out a case-by-case discussion in all areas since equivalence and divergence are totally different issues. Nonetheless, analysts remain confident that a new bond of trust and improved relations will be built between the UK and EU, as they are close neighbors who could benefit from each other a lot in the coming years. This is especially true, given the importance of incorporating finance into wider “green” economic recovery policies and supporting the development of digital finance amidst the current crisis.