Understanding Sajid Javid's Call for Permanent Equivalence vs. EU Regulatory Standards

In the ongoing negotiations between the UK and the European Union (EU) post-Brexit, a key point of contention has been the issue of financial services equivalence. Sajid Javid, the UK's Chancellor of the Duchy of Lancaster, has recently called for permanent equivalence in financial services with the EU, asking for the UK to enjoy access to the EU's financial market without the need for obligations. This stance clashes with the EU's requirements and expectations.

Strengthening the EU Internal Market through Rules and Compromises

The EU has built a comprehensive and stable internal market by establishing certain rules and regulations that all member states must comply with. This framework ensures a unified and harmonized financial services market, which is essential for the EU's economic health and stability. For the UK to benefit from this market without fulfilling the necessary obligations would be contrary to the EU's commitment to maintaining a uniform and robust internal market.

The Bridge to Nowhere

Javid's suggestion that the UK can enjoy access to the EU's financial market without making any commitments is seen as misleading. The EU's stance is clear: the UK cannot have access without fulfilling its obligations. This perspective is reflected in the words of Michel Barnier, the EU's chief Brexit negotiator, who has emphasized that there will be no general global permanent equivalence with the UK. In essence, the UK cannot "eat the cake" (enjoy benefits) without "paying the price" (accepting obligations).

Equivalence and Its Limitations

Equivalence, as a principle, means that certain financial activities can be recognized as meeting the standards of another jurisdiction. However, it comes with limitations. For instance, basic banking activities are explicitly excluded from this framework. Moreover, the EU has the authority to revoke or modify access to its markets with just 30 days' notice in some cases. This is particularly relevant for trading and clearing services, where the EU might need to act swiftly to protect its regulatory standards.

Regulatory Cooperation and Challenges

While the concept of equivalence sounds promising in theory, it can be challenging to implement in practice. For example, the Comprehensive Economic and Trade Agreement (CETA) includes provisions for regulatory cooperation, but the required cooperation agreements between regulators have not been fully established. This means that the UK's regulators are not yet obligated to police violations in the host jurisdiction, making the concept of equivalence less practical than it appears.

Global Regulatory Framework and Limited Leeway

It is crucial to recognize that the primary driver of financial regulation today is not the EU alone but the G20 and other international bodies. The UK's membership in the G20 means it is part of a global process that shapes regulatory frameworks. As long as the UK wishes to stay within this framework, the potential for significant divergence is limited. While there may be some flexibility in the processes, the fundamental principles such as capital adequacy ratios and the qualification of financial instruments are generally fixed.

Furthermore, establishing regulatory equivalence can be a lengthy and complex process. Given the small potential leeway and the significant hassle involved, the benefits of varying procedural rules and engaging in endless equivalence debates do not outweigh the costs. The emphasis on a level playing field, which has motivated the shift from directives to regulations, further underscores the importance of adhering to established regulatory frameworks.

Conclusion

The UK's pursuit of permanent financial services equivalence with the EU is a complex issue with significant challenges. While the concept is appealing, the practical implications and the EU's stance make it a challenging objective. For the UK to navigate these negotiations successfully, it must be prepared to engage in a robust regulatory framework and understand the realities of establishing and maintaining equivalence in the financial services sector.