Examining ‘equivalence’, as Brexit starting gun fired

On 29 March, a six-page letter from UK Prime Minister Theresa May to European Council President Donald Tusk set the two-year article 50 timeline ticking on Britain’s exit from the Union. In view of a possible loss of passporting rights, Jonathan Herbst and Simon Lovegrove assess the position for UK financial services when it comes to equivalence with the EU regime.

Jonathan Herbst is global head of financial services at law firm Norton Rose Fulbright and Simon Lovegrove is head of financial services knowledge – global. Contact them on jonathan.herbst@nortonrosefulbright.com and simon.lovegrove@nortonrosefulbright.com.

It is widely accepted in the City that equivalence in its current form is no ‘silver bullet’ to the United Kingdom’s loss of passporting rights. There are a number of drawbacks associated with equivalence and these have been widely discussed in the press. One of the key drawbacks is the patchwork-like framework of equivalence provisions across European Union legislation, with some noticeable gaps (for example the lack of equivalence provisions for lending activities under CRD IV). There is also the opacity of the European Commission decision-making process for determining equivalence, which can be both lengthy and politically contentious. In addition, a number of equivalence provisions are so far untested; MiFID II, MiFIR and the Benchmarks Regulation being examples. Moreover, there is the problem that the Commission can withdraw an equivalence determination should domestic legislation diverge too far from EU law. This often means that local firms are reluctant to conduct long-term planning based on an equivalence determination.