The EU's Equivalence Decision and Its Geopolitical Implications for UK Financial Services

The European Union's (EU) decision to grant equivalence to the United States and Japan in financial services has sparked debate and concern over the UK's access to the EU market post-Brexit. This article will explore the nuances of EU financial equivalence, the reasons behind the EU's decision, and the geopolitical implications for the UK.

The Principle of Financial Equivalence

No third country has permanent and unconditional access to the EU's financial markets. Access is granted based on the EU's judgment that the financial regulations of the third country are equivalent to EU regulations. This equivalence can be withdrawn at any time, and the EU regularly reassesses the equivalence status of third countries.

During the Brexit negotiations, the UK had hoped to secure permanent financial equivalence, even if its regulations changed. However, the EU already has established criteria for assessing equivalence, and the UK’s demands did not align with these standards.

Advent of EU's Adaptive Approach

The EU's approach to financial equivalence is adaptive and contingent. They do not offer permanent equivalence because it creates a regulatory risk. Instead, they provide temporary equivalence to avoid disruption, and equivalence to other countries to create competition with UK-based financial service providers.

Andrew Bailey, the Governor of the Bank of England, favored an interpretation that the EU would grant equivalence status only if the UK agreed to change its rules in sync with the EU, essentially turning the UK into a rule-taker. He argued that this is not acceptable, especially since UK rules govern a system that is ten times larger than the UK's GDP. This highlights the complex balance between regulatory alignment and financial sovereignty.

Geopolitical Concerns and EU Protectionism

The EU's decision to not offer permanent equivalence and instead to create a regulatory risk is tied to broader geopolitical concerns. The EU is wary of competition on its doorstep, and the UK's financial services sector is exceptionally strong. Any changes in UK regulations could weaken the EU's financial services sector.

Additionally, the EU does not want to encourage its own member states to seek more emboldened regulations. Dissent and unrest within the EU are already significant, and the UK referendum to leave the EU has further exacerbated these issues. The EU's sensitivity to geopolitical risks has led them to adopt a cautious approach to equivalence and regulation.

Strategic Implications for the UK

The UK's financial sector has faced significant challenges in securing the necessary equivalence status, which is critical for its continued success in the EU market. Several strategies could mitigate these risks:

Stay Up-to-Date with EU Regulations: Regularly aligning with EU regulations can help maintain equivalence status. Develop Competitive Edge: Focusing on innovation and maintaining a competitive edge in financial services can mitigate reliance on UK equivalence. Create Domestic Competition: Promoting competition within UK financial services could encourage the development of innovative products and services.

The EU's approach to financial equivalence is complex and multifaceted, involving both regulatory and geopolitical considerations. As UK financial services navigate these challenges, it is crucial to leverage the unique strengths of the sector to mitigate risks and capitalize on new opportunities.

Conclusion

The EU's decision to not offer permanent financial equivalence signifies a strategic move to protect its own financial sector while maintaining control over a key industry. As the UK seeks alternative solutions, understanding the regulatory landscape and leveraging strategic partnerships will be critical for its financial services sector's growth and success.