The U.K. is proposing new economic and regulatory arrangements for financial services for its future relationship with the European Union, recognizing that existing passporting and equivalence regimes will not be sufficient once the U.K. is no longer in the EU.
In a policy paper outlining the proposals on relationships following its exit from the EU on March 29, 2019, the U.K. government noted that U.K. and EU financial services markets "are highly interconnected."
Financial services made up one section in the 104-page paper. The government noted that about £1.4 trillion ($1.9 trillion) in assets are managed in the U.K. on behalf of European clients.
"This interconnectedness also highlights the U.K.'s and the EU's shared interest in financial stability," the paper said.
While the EU has a number of provisions in place such as equivalence — under which frameworks allow third-country firms to provide services to clients in the European Economic Area, on the condition that the rules of their domestic market have been deemed equivalent — a new economic and regulatory arrangement is required.
The U.K. wants to maintain "the economic benefits of cross-border provision of the most important international financial services trade between the U.K. and the EU — those that generate the greatest economies of scale and scope — while preserving regulatory and supervisory cooperation, and maintaining financial stability, market integrity and consumer protection," the paper said.
The new arrangement is based on the principle of autonomy for the U.K. and the EU over decisions related to access to each market. A bilateral framework of treaty-based commitments would underpin the relationship, ensure transparency and stability, and promote cooperation. "Such an arrangement would respect the regulatory autonomy of both parties, while ensuring decisions made by either party are implemented in line with agreed processes, and that provision is made for necessary consultation and collaboration between the parties," the paper said.
Existing autonomous frameworks for equivalence would need to be expanded to reflect that, as it stands, EU equivalence "is not sufficient in scope for the breadth of the interconnectedness of U.K.-EU financial services provision. A new arrangement would need to encompass a broader range of cross-border activities that reflect global financial business models and the high degree of economic integration."
However, the U.K. said this arrangement cannot replicate the existing EU passporting regime, which allows firms in member states to provide financial services across the EU under a common set of rules.
"As the U.K. and the EU start from a position of identical rules and entwined supervisory frameworks, the U.K. proposes that there should be reciprocal recognition of equivalence under all existing third-country regimes, taking effect at the end of the implementation period. This reflects the reality that all relevant criteria, including continued supervisory cooperation, can readily be satisfied by both the U.K. and the EU," the paper said. "It would also provide initial confidence in the system to firms and markets."