LONDON (Reuters) - The European Union’s existing system of market access for foreign financial firms is not perfect but can work for Britain with “clear limits” after it leaves the bloc next year, the EU’s financial services chief said on Tuesday.
The so-called equivalence system is based on Brussels granting access to the EU for banks, insurers and asset managers from outside the bloc if the bloc deems their home rules to be similar enough.
But Britain has said equivalence is too one-sided and wants a bespoke trading deal for banks based on mutual recognition or the UK and EU accepting each other’s rules.
Some equivalence decisions, such as with U.S. derivatives clearing, dragged on for several years, leaving the industry in limbo.
Valdis Dombrovskis, European Commission Vice President and responsible for financial services, said that equivalence was a pragmatic solution and “a probable” way for Britain after Brexit.
“Equivalence is not perfect, neither for firms nor for supervisors,” Dombrovskis told the CityWeek conference at the Guildhall in London, in the heart of the City.
“But we should not let perfect be the enemy of good. Equivalence has proven to be a pragmatic solution that works in many different circumstances, and it can work for the UK after Brexit as well.”
EU leaders agreed in March that “improved” equivalence could form part of future trade negotiations with Britain for financial services.
Britain and bankers have seized on this as a sign that a more bespoke type of trade deal is now more likely.
But Dombrovskis said this meant adapting equivalence when applied to a country that is systemic for the EU - Britain is the biggest financial centre in Europe. There should be more “granularity” and closer scrutiny when deciding if rules are similar in such cases, he said.
“In spite of these improvements, there are some clear limits to equivalence,” he said.
Equivalence will remain unilateral and discretionary EU acts won’t cover all financial services and would be withdrawn if a non-EU state “should happen to go different ways,” Dombrovskis said.
Catherine McGuinness, political leader of the City of London, the historic “Square Mile” financial district, said after Dombrovskis’ speech that a mutual recognition deal would be best for Britain and the EU.
“Clearly we have work to do,” she added.
Last December Switzerland’s stock exchange was only given temporary equivalence access, angering the Alpine state, whose minister for international finance, Joerg Gasser, cautioned Britain about going down the same road.
“Equivalence decisions are never only technical, they are most of all... political,” Gasser told CityWeek.
Andrew Bailey, chief executive of Britain’s Financial Conduct Authority, said the equivalence regime doesn’t best suit any parties, and that a mutual recognition agreement is “eminently achievable”.
Britain and the EU have agreed in principle on a “standstill” transition deal from Brexit Day in March 2019 to the end of 2020, but it won’t be ratified until October or later.
British regulators have said banks should be allowed to use the transition period to take more time to implement Brexit plans.
But Dombrovskis said that until ratification, financial firms in Britain who need to continue serving EU customers after next March should continue with plans for new hubs in the bloc in case there is no transition deal from next March.
“As Vice President in charge of financial stability, my message is that all parties – firms and supervisors - need to continue their work to prepare for all scenarios,” Dombrovskis said.
“Our current discussions confirm that companies can alleviate the main risks by repapering contracts and adapting operational models,” he added.
Repapering refers to moving accounts of customers from Britain to existing or new hubs in the EU27.
Reporting by Huw Jones, editing by Marc Jones/Hugh Lawson/Alexander Smith