The UK’s likely pursuit of equivalence, how will this play out?

On March 29, 2017 Article 50 was triggered by the UK government and the path to Brexit was firmly set. This provided a clear stance on the UK’s place in the world and its commitment to Brexit. With the initial focus of Brexit negotiations on key issues like free movement, citizen rights and the Irish border, questions about the future state of trade and the financial sector remain largely unanswered. There is little clarity on what this means for the future state of the UK financial services sector and for the UK’s ever more likely move from a passporting regime to one of equivalence with EU regulatory bodies.

The UK Financial Services industry would probably agree that Brexit poses one of the single biggest set of risks and opportunities to the sector in its foreseeable future. On the one hand, Brexit brings the likely loss of the UK Financial Services industry’s passporting rights across the European Union (EU). On the other, Brexit could create opportunities for some regulatory divergence, within the limited boundaries of EU equivalence regimes.

To quickly define passporting, it is “the right of companies authorised in one country of the European Economic Area (EEA) to carry out a range of permitted business activities” across the EEA.[1] With nine different regulatory passports, available across a range of financial services, the passporting regime has allowed UK based and international banks with their European headquarters in UK, to then cater to customers across much of Europe. Given the politics at play, retaining passporting rights post Brexit is looking increasingly unlikely and so this brings us to the nearest alternative, equivalence.

Citing the British Bankers Associations’ Brexit Brief publications, equivalence in this context is where “one country declares that the standards of another in a defined area are sufficiently close to its own to be deemed equivalent[2].” This is in effect a system which is managed at the discretion of EU regulatory bodies where, in theory, equivalence can be withdrawn.

How is the UK’s pursuit of equivalence likely to play out?

The UK’s regulators have been clear in their support for a gradual transition to a ‘to be’ model of life post Brexit with the likely solution being one of equivalence, underpinned by comparable but not identical rules.[3] For the time being, however, there is no real clarity on the move towards equivalence or the steps that may be required to negotiate what is effectively a financial services free trade agreement.

What will it take to deliver equivalence?

A legal definition of equivalence would be one where two or more systems share comparable objectives, regulatory principles, regulatory culture, and outcomes.[4] Though most large global financial systems would meet this definition of equivalence on the basis of the minimum requirements set out by Basel II, this does become less clear cut in other areas. The following are some steps required to reach an agreement of equivalence with the EU[5]:

  1. EU decides to review equivalency for country
  2. European Commission carries out assessment with support from supervisory agencies
  3. Where equivalence is found, this must be ratified by EU member states through EU examination procedure
  4. Post equivalence, individual firms may still need to apply for authorisation from relevant EU regulators
  5. Finalising equivalence arrangements often requires the counterparty to also offer equivalence

In practice the above is neither a simple nor a short process with few successful examples seen to date, with provisions to obtain equivalence only clearly outlined within Markets in Financial Instruments Directive (MiFID) II and Alternative Investment Fund Managers Directive (AIFMD).

What does this mean for the UK and banks in general?

Equivalence offers the UK an opportunity to continue to export its financial services to Europe while also allowing European banks and firms to more easily obtain funding from UK banks. It does, however, come with large risks, most notably the fact that the EU or the UK can withdraw equivalence at any time. Also, only a limited range of services can be granted equivalence and agreeing equivalence regimes with individual countries creates further regulatory barriers for UK based firms.

With so many unknowns, planning for Brexit would require clear strategic direction and a flexible approach. Better mitigating these risks when planning for Brexit can help UK banks and the UK at large better manage the changes associated with Brexit.

  1. “Goodbye Passport, Hello Equivalence? Brexit Banks Lower Sights”, Bloomberg, Gavin Finch & John Glover, January 13, 2017. Access at:
  2. “What is ‘equivalence’ and how does it work?,” BBA, Brexit Quick Brief #4, December 2016. Access at:
  3. “Top UK financial regulator calls for clarity on Brexit transition,” The Financial Times, Caroline Binham, July 7, 2017. Access at: 
  4. “Examining Regulatory Equivalence,” Norton Rose Fulbright, January 12, 2017. Access at:   
  5. “What is ‘equivalence’ and how does it work?,” BBA, Brexit Quick Brief #4, December 2016. Access at: 


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