A Brexit sub-committee dedicated to the issue of financial services has today heard that the UK should be “careful of assuming there will be equivalence” once it has negotiated its exit from the European Union.
The asset management industry is a particular area of concern when it came to equivalence, Cambridge professor of securities and companies law Eilis Ferran told today’s meeting.
Joined by London School of Economics professor Sir Charles Bean, Ferran argued Switzerland had experienced difficulties with equivalence due to constant renegotiations every time financial services regulation changes, which “moves very fast”.
Equivalence has been posited as a way to circumnavigate the potential loss of passporting, which allows asset managers and other financial services to carry out a number of activities across other EU states by having a presence in London.
But equivalence represents precarious access to the European Union, unlike passporting, because it can be revoked.
“We should be careful of assuming there will be equivalence solutions across the board. There are not, there are key areas that are not covered by equivalence,” Ferran told the EU financial affairs sub-committee in the House of Lords today.
“An area that I would pick out being hit in a significant way would be asset management, so all of the European fund brands, Ucits and the like, will no longer be available to UK funds and fund managers.
“We’d then be in the very complex world of being a third country under the notorious Alternative Investment Fund Managers Directive. The third country provisions of that stand out as one of the most complex and unsatisfactory sets of EU post-crisis law. The passport under that comes at a heavy price. It comes at the price of having to comply with EU law, the world would be significantly different there.”
Bean said he endorsed Ferran’s view that lawmakers UK’s equivalence status should not be assumed. “It would be very easy to think we could get equivalence in lots of areas because by definition we’re equivalent at the moment since we’re part of the single market. In practice proving equivalence and maintaining it is quite challenging.”
Bean said in selected areas of financial services equivalence may be viable, but not across the board.
“The only way I could see equivalence operating on a long-term basis is to accept that if we want to be selling financial services under an equivalence basis that we would just have to accept that we would be adopting whatever regulations the EU decides on. It would be quite difficult for us to think about this as a negotiation. There may be some small areas, but predominantly we would be driven by decisions by the other European Union member states,” Bean says.
Questioned about the precarious nature of equivalence, which means it can be revoked at any time, Ferran says she is confident the EU will not play politics. “The EU needs us as much as we need them,” she says, adding that both countries are keen to maintain their international profiles and are committed to international markets.
Speaking on the Swiss model, Ferran says renegotiations happen “every time something changes” and argued the UK would need a “streamlined” process to avoid that.
“Financial services moves very fast and there will be new things and we will start to diverge.”
Ferran listed euro clearing houses as another financial services activity that would be severely hit. Ferran says clearing house equivalence between the US and EU took three years to negotiate, but argued it could be more efficiently established with the UK as it is already part of the single market – providing politics did not get in the way.
Bean added: “The issue of euro clearing, I wouldn’t say it’s likely we’ll lose it, I’d say it’s certain we’ll lose it.”