Early on in the Brexit to-ing and fro-ing, the EU took the position that UK financial services players would have to conduct their European business through operations in the EU supervised by EU regulators. It was a major concession by the EU to relent and say it was willing to allow for “equivalence.” That would mean that UK firms could offer financial services in the EU without being directly supervised by EU authorities if the EU had determined that the UK rules and oversight mechanisms were sufficiently close to those of the EU to be acceptable.
It turns out that despite the EU seeming to change its position, it isn’t clear at all that the EU has actually budged. From a Financial Times article in February 2017:
The City of London’s hopes of maximising access to the EU are set to be dealt a blow by European Commission plans to take a tough stance on rules that could provide a post-Brexit lifeline for the UK financial sector…..
Instead, many are looking to take advantage of the EU’s equivalence provisions, which make it simpler for foreign institutions to do business with Europe, as long as Brussels trusts their home countries have similar standards of oversight….
But the commission’s “staff working document” emphasises Brussels’ determination to carry out “continuous follow-up monitoring” to make sure countries deemed equivalent still meet the criteria. It also stresses the commission’s power to withdraw the status at any time in light of “contrary developments”.
Brexit supporters argue that the UK could disentangle itself from the EU’s financial rules while still benefiting from market access. But the document makes clear that one of the commission’s prime concerns is to make sure that no country can get or keep equivalence if it conducts a regulatory bonfire or retreats to light-touch supervision….
The document argues that the EU should set “sufficiently robust prerequisites”, or conditions, before it grants equivalence, including the “on-site” inspections of overseas firms operating in Europe and “effective access to data”…
The EU official cautioned that equivalence remained “very much case-by-case. One sector doesn’t set a precedent for another, one country doesn’t set a precedent for another”.
Maybe I am missing something but the update in today’s pink paper does not sound all that different. Key sections:
The EU’s financial services chief has warned that Brussels will be strict in policing the Britain’s rights of access to the bloc’s market after Brexit.
Valdis Dombrovskis said he welcomed UK proposals to build market access for the City of London around EU rules, known as “equivalence”. But he said market access could never be taken for granted, with Brussels determined to toughen its assessments of whether countries meet the conditions….
He also said Brussels was pressing ahead with measures to reinforce oversight of equivalence access, with stronger requirements for countries’ financial supervisors to share information with the EU and more monitoring of whether jurisdictions continued to meet the criteria…
Many EU officials privately assume that the UK — barring a sea change in its regulatory and supervisory approach — would have little difficulty in securing equivalence rights after Brexit, given that it already applies EU rules.
But Mr Dombrovskis’ remarks are a sign of Brussels’ determination to prevent regulatory undercutting that could hand City firms an advantage over EU competitors.
I may be unduly skeptical, but the Financial Times has too often given optimistic readings about the EU cutting the UK breaks on points under discussion, only to be proven wrong. While it may not be true of the “EU officials” sounded out for this piece, the Financial Times has exhibited a tendency to be much closer to UK-friendly sources in the Eurocracy and thus has not always been able to take an accurate pulse.
The concrete part of the article is that the UK produced a white paper in July saying it wanted the benefits of equivalence after 2020. Dombrovskis is making friendly noises while also making clear that the EU needs to see exactly what the UK is proposing and it isn’t about to be a pushover. This is the part of the article that if I were with a UK financial services firm, would give me pause:
Mr Dombrovskis said Brussels was not offering any kind of “super equivalence” to the UK, and that assessments of whether Britain qualified would require individual assessments “sector by sector and legislation by legislation”.
The fact that the EU is looking at a series of narrow deals in and of itself is a big problem for the UK. The Government is going to be overwhelmed by the number of trade and other agreements it needs to secure even if it gets a transition agreement from the EU, which as we discussed earlier this week, is looking less and less likely. IF the UK crashes out in March 2019, presumably nothing would be in place yet.
To add to the cheer of the day, Lambert sent on this must-read tweetstorm. Des was one of the few to predict the 1997 emerging markets crisis:
And to repeat a saying from a colleague: “Things always look the darkest before they go completely black.”
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It seems to me that the FT still focused on the equivalence thingy and ignoring the risks reviewed in the tweet storm proves that Des is quite correct on his analysis. One should never underestimate the ability of Mr Market to worsen outcomes in the worse of the moments.
It is getting increasingly clear that Brexit will be at the core of next recession. Precisely because markets are ignoring this outcome.
There is a difference in ‘equivalence,’ even should Britain secure this, that is under-weighted in forward evaluation, to me. Now, as an EU Member State, it is British regulators who decide if British financial activities comply with EU standards, and British regulators who effect remedies where necessary. Post-Brexit, it will be non-British EU regulators who make all such decisions. Period. End of story. A Yurpo will decide if any British financial action or organization is up to snuff. Right of appeal will be highly restricted, believe it, and that is, again, if Britain secures a deal rather than crashes out.
Today, with Britain heavily intermediated in European financial activity, equivalence is close, and any inclination by Continentals to lift carpet edges or demand concessions is limited. Those conditions cannot be assumed to hold going forward. Would a European regulator be inclined to be merciful with RBS in conditions like back in 2008-12? They aren’t sympathetic to bolloxed Spanish banks even now. So no, I can’t see British institutions getting the kind of slack that they have had from home regulation. None of this matters until it does, but on a day it will, and then the matter will hit the fan and blow back west rather than east.
If you’re not in the club, you don’t get gentleman’s privileges. You get held upside down by the ankles and shaken for everything that falls out of your pockets; or you hand over your wallet peacefully to avoid the embarrassment to all concerned. That’s my view.
Its been a consistent mystery to me why Mr. Market has, after an initial selling of Sterling, seemed remarkably sanguine about Brexit. Even if you believe that a deal is likely, there are so many potential black swans out there associated with the process that it makes the UK a very risky investment. I guess it comes down to habit, the markets believe that true catastrophes only happen in developing markets.
As to the issue of the City of London, the EU has no incentive whatever to give them much room to manoever. City governments all across Europe are gagging to get their hands on some of its functions (and jobs). The only thing holding them back is concerns about the adequacy of regulatory structures (the Irish Central Bank and the Irish government are at loggerheads over this – the former being deliberately obstructive over London transplants because of fears they can’t regulate them adequately, the latter gung-ho).
At best, the EU will aid the City of London in slowing things down to ensure that Paris, Amsterdam, Frankfurt, Dublin and Milan are ready. Either that, or extract a very heavy price in other sectors.
I would like to add that at one of the largest UK asset managers, they are now convinced that Ireland is going to come to the rescue with some mysterious “Memorandum of Understanding” which will mean that everything will be peachy keen for Irish fund co’s that delegate the management of the underlying pool of assets to the UK entity that actually owns the Irish fund co. But they view the likelihood of Brexit being called off or a transition deal being completed in time as high.
And yet, the CBI (Central Bank of Ireland) will reject any application for new or expanded European entities owned by UK asset managers if they don’t include not the traditional 3, but 5 permanent roles for European citizens. This includes having to have a CEO and COO along with Risk, Compliance, Sales /Client Service. And you don’t have a CEO or a COO without some people to CEO or COO. It needs to be a proper firm…
People are NOT interacting with what is happening in front of them.
It strikes me as a certainty that the EU will strip out most profitable functions from the City in ANY post-Brexit situation. Not overnight; no one wants sudden instability. But it is so greatly in the interest of the EU and its Member States to poach the business that it has to be taken as far and away the odds on outcome.
Nobody in the City believes that they can freeze if they choose to sleep outside the circle of firelight. The thing is, capital is mobile, boys. Until now, the bet has been that a deal gets done, because the ‘un done’ side of the bet is damned ugly for those sitting Thameside.
The European Council in September will be critical for the markets because it is the last conceivable time and place that an effective separation accord could be agreed to and gotten on track in time. After that, the only real options will be crashout or the Great British Flinch. Yves has already surveyed which of those outcomes is the one more consonant with present conditions.
I think that at this stage, we can surmise that the UK is attached to another object by an incline plane wrapped helically around an axis-
https://www.youtube.com/watch?v=DpnvS7kM4Fs
Its a Schrodinger’s market right now… until someone looks in the box.
I still don’t understand why the pundits use the false dicotomy of ‘soft’ or ‘hard’ to describe Brexit – as if it were, for comparison, Yin and Yang. It is not a binary outcome and therefore this dichotomy simply does not exist.
It doesn’t look like a velvet glove to me.