Countdown to Brexit: 29 days – EU raises the bar for UK-based financial services firms wishing to trade in Europe
The European Parliament has given the European Commission greater powers in determining which ‘third country’ financial services firms – which includes UK companies from the moment of Brexit - will be given access to EU clients.
The changes are part of a wider reform of the regulation of broker-dealer banks, asset management companies and investment advisers. On Tuesday – 26 February – agreement was reached regarding changes to the ‘equivalence’ regime. This decides on which ‘third country’ companies are granted access to EU markets. The UK becomes a ‘third country’ at Brexit.
Until that moment, all such financial services and companies that are regulated in the UK have freedom to trade in any of the 28 EU nations – one of the four freedoms guaranteed as part of EU membership: goods, people, services and capital.
The agreement means that Brussels will determine market access in respect of a range of key financial product areas, including: investment advice, organising IPOs, asset management and support for Mergers and Acquisitions. The updated market access rules will apply to the UK whether or not Brexit is with a ‘deal’ and transition period – or whether there is a ‘no-deal’ exit.
The financial press - including the FT and Bloomberg - have deemed the move to be tougher on UK financial firms with headlines saying that they: “were dealt a blow after European Union policy makers agreed to tighten the rules governing the City of London’s access to the bloc after Brexit”.
The proposal is for the European Commission to get additional representation from across the EU’s member states and the European Parliament in order to flesh out the existing requirements for allowing third country firms to do business in the bloc – ensuring that Britain will have to mirror and comply with all EU regulations.
According to a statement from the European Council – comprising the heads of nation states: In particular, the European Commission is charged with assessing capital requirements applicable to firms providing bank-like services.” The toughest requirements apply when activities “are likely to be of systemic importance,” it said. London is presently the EU’s most important financial centre.
The core issue is a set of ‘equivalence’ rules. The EU has said that they are all that the UK financial industry could hope for after Brexit. Under that system, officials in Brussels determine whether a third country’s rules are as tough as the ones in the EU – before deciding whether to allow firms based and regulated in that country to sell services in the bloc.
The European Commission officials have argued that the present system was not designed with Brexit in mind - and that it needed to be adapted to the situation.
The ‘equivalence rules’ under a regulation – ‘MiFID II’ - opened the door to a range of wholesale financial services from outside the EU and took effect in 2018.
Since the referendum in 2016, UK banks have had to repeatedly lower the expectations for the amount of business they will be permitted to undertake in the EU after Brexit. UK Government and officials initially dismissed the ‘equivalence’ framework as “inadequate”. However, it was later agreed to and included in the “Political Declaration” that outlines the future relationship between the EU and Britain.
This weeks’ changes apply to ‘investment services’, such as advice on mergers and acquisitions or helping clients raise capital. More traditional banking activities – such as deposit taking and lending – are not covered by any third-country regime. Companies are required to be based in the EU in order to serve clients there. We have reported on the moves of many non-EU banks that were head-quartered in London moving to Paris, Amsterdam, Dublin and Frankfurt.
The European Banking Authority was one of the first EU Agencies to be relocated out of London in a move decided by the EU27 remaining states in November 2017.
Now, according to EU Authorities, activities by firms outside the EU that might be of strategic importance to the bloc could have “some specific operational conditions” attached to any decision allowing market access. The aim is to: “have the necessary tools to prevent regulatory arbitrage and monitor the activities of third country firms.”
The third country revisions are part of an overhaul of the rules for investment firms such as asset managers, brokers and proprietary trading firms. These companies are currently all subject to the same regulations as banks – but the EU is planning to introduce a more tailor-made regime - especially for smaller firms that pose fewer structural risks to the financial system.
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