There are over 40 areas of potential equivalence in UK-EU financial services law. But they are so narrow that UK banks stand to gain little.
It is often said that if the EU gave UK banks equivalence, life would be much easier for UK plc and its banking community. But that is not really true.
There are more than 40 areas of potential equivalence. But they are very narrow, and sector and activity specific. So narrow and specific, in fact, that the UK’s payment firms and e-money issuers will literally gain nothing, while the UK banks will not gain much. Why?
The law of the EU was designed, quite openly and deliberately, to protect the union, its member states, its banks and their customers. These are not political points. Like every competent jurisdiction, when the EU makes its laws, it thinks mainly of itself.
So, for example, the EU’s lawmakers gave the union’s institutions the power to grant equivalence to non-EU countries because it would simplify and reduce the burden of the EU’s bank capital requirements, for the benefit of its banks, when they had exposures to non-EU equivalent jurisdictions.
The same lawmakers also gave the EU’s institutions the power to grant equivalence to non-EU countries because, if the union’s regulators could work with the regulators in equivalent non-EU equivalent jurisdictions when they were supervising groups headquartered outside the EU, they would not have to force some groups to reorganise themselves. This means they could be supervised from within the union instead.
That does not mean that, if the EU eventually gives the UK equivalence, it will not help. It will. But it will not help many UK banks, and it will not help them very much.
Many UK banks have reorganised themselves, [as] they no longer believe equivalence is coming
If you are in any doubt about these things, there is plenty of evidence. This is why the EU has only made two temporary equivalence decisions for the (notional) benefit of the UK, so far. It has decided that the UK’s legal and supervisory arrangements for central securities depositaries and central counterparties can be regarded as EU-equivalent until June 30, 2021 and June 30, 2022, respectively.
These decisions were not taken to help the UK. They were taken to give European institutions the time they need to move their business into the EU, without creating unnecessary instability. The EU has been very clear about its reasons for doing this: the union wants the business to move, in order to regulate it to protect its own financial stability. And, when the business has moved, the equivalence decisions will not be renewed. This is also why so many UK banks have reorganised themselves: they no longer believe equivalence is coming; and they recognise that, if it does, it is unlikely to last.
UK banks were net beneficiaries of these arrangements when the UK was a member of the EU, and they will almost certainly be net losers now that it’s not.
Some say this gives us at least one opportunity: the UK can finally scrap the bonus cap. That is true. But it is unlikely to happen in the short or medium term, if it happens at all. Why? The UK government wants to use Brexit to pursue its levelling-up agenda, especially in the ‘red wall’ seats. In its view, a ‘bankers’ Brexit’ will sit very badly with that.
It must also be the case that, while it made little or no sense, from a prudential point of view, for the EU to cap bonuses when it did, it probably makes little or no sense to uncap now, especially if base pay would have to be forced down to allow higher bonuses to be paid, and total compensation to broadly the same.
Some banks are still waiting to see if equivalence will eventually come. My advice? You have probably already waited too long.
Chris Finney is a partner focused on financial services at law firm Fox Williams.
