Financial Services Equivalence in the UK during and at the end of the Brexit Implementation Period

The Equivalence Determinations for Financial Services (Amendment etc) (EU Exit) Regulations 2020 (the 2020 Equivalence Regulations) have been made to ensure that the UK has a coherent and functioning financial services equivalence framework in place now and at the end of the Brexit implementation period.

What is the UK's financial services equivalence framework?

The equivalence regime allows the Treasury to determine that another country’s regulatory and supervisory regime is equivalent to the UK’s corresponding regulatory framework. A determination of equivalence:

• allows the UK's regulatory authorities to rely on the supervised entities' compliance with equivalent rules in another country

• can help to reduce or eliminate overlaps in regulatory and supervisory requirements between the UK and the other country

• can allow a less burdensome prudential regime to apply

• can facilitate the cross-border exchange of services and products and may allow UK authorities to rely on compliance with another country’s regime.

What are the elements of the equivalence framework?

There are three components of the equivalence framework:

• equivalence determinations made by HM Treasury that another state has a regulatory regime for a particular firm or product which is equivalent to that in the UK. To make an equivalence determination HM Treasury typically will have to verify that the rules of the other state are legally binding, ensure effective supervision by authorities and achieve the same results as the equivalent UK regulatory regime;

• cooperation arrangements established between the UK regulators and their counterparts in the other state. These cooperation agreements generally deal with matters such as mechanisms for the exchange of information relating to the equivalence assessment and supervising compliance;

• recognition, registration or certification decisions made by the UK regulators to allow those firms or products covered by an equivalence determination and a cooperation agreement (and that meet any additional criteria required by the particular financial services regime) to operate in the UK.

What do the 2020 Equivalence Regulations do?

As well as making amendments necessary to remedy deficiencies in retained EU law (for the explanation of which see here), the 2020 Equivalence Regulations work in tandem with The Equivalence Determinations for Financial Services and Miscellaneous Provisions (Amendment etc) (EU Exit) Regulations 2019, as amended (the 2019 Equivalence Regulations).

The 2019 Equivalence Regulations give HM Treasury a temporary power, during the implementation period, to make equivalence determinations by direction for EU and EEA member states. This is a stop-gap measure that will apply until the long-term UK equivalence framework comes into force at the end of the Brexit implementation period. After the power expires, and for any countries other than the EU and EEA member states, equivalence decisions made by the Treasury must be made by regulations subject to the negative procedure.

Once an equivalence determination is made by direction under the 2019 Equivalence Regulations for a particular financial services regime, the 2020 Equivalence Regulations provide for the UK regulators to establish cooperation arrangements with EEA regulators, and allow the UK regulators to accept applications from EEA financial services providers for regulatory decisions before the end of the implementation period.

Which financial services regimes are covered?

The 2019 Equivalence Regulations and the 2020 Equivalence Regulations deal with equivalence determinations, cooperation agreements and recognition, registration or certification decisions under the following retained EU law financial services regimes:

• Article 30 of Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds (the Benchmark Regulation);

• Article 5 of Regulation (EC) 1060/2009 of the European Parliament and of the Council of 16 September 2009 on credit rating agencies (CRAR);

• Article 25 of Regulation (EU) No 909/2014 of the European Parliament and of the Council of 23 July 2014 on improving securities settlement in the European Union and on central securities depositories (CSDR);

• Articles 75 and 77 of Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories (EMIR);

• Articles 46 and 47 of Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments (MiFIR);

• Article 30 of Regulation (EU) No 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/EC (the Prospectus Regulation);

• Article 19 of Regulation (EU) 2015/2365 of the European Parliament and of the Council of 25 November 2015 on transparency of securities financing transactions and of reuse and amending Regulation (EU) No 648/2012 (SFTR).

What does this mean for equivalence at the end of the implementation period?

The 2020 Equivalence Regulations provide that any equivalence determinations made by direction under the 2019 Equivalence Regulations, and any regulatory decisions made under the 2020 Equivalence Regulations themselves, before the end of the implementation period will, after the end of the implementation period, have effect as if made under the relevant provisions of retained EU law.

The 2020 Equivalence Regulations are clearly aimed at ensuring that, as far as possible, the same laws and rules that are currently in place in the UK will continue to apply at the end of the implementation period, to provide continuity and certainty to firms and their customers. Just how the powers conferred on the UK regulators by the 2020 Equivalence Regulations will be exercised is likely to depend on the outcome of UK-EU discussions on equivalence in financial services.

More generally, the power conferred on HM Treasury to make equivalence decisions going forward may interact with the temporary transitional power (TTP) of the Financial Conduct Authority (FCA). The FCA has indicated that it will confirm its approach and outline whether it will use the TTP for equivalence provisions once HM Treasury has set out how it intends to use its powers to make equivalence determinations.

While the 2020 Equivalence Regulations and the TTP are short term fixes, HM Treasury has made clear, in its consultation on the Financial Services Future Regulatory Framework Review that the UK government sees the UK’s departure from the EU as an "important opportunity to review [the UK's] framework arrangements and ensure that we have an overall approach to regulation of financial services which is right for the UK". A regime for financial services based on retained EU law (amended so that it will operate effectively in a UK-only context), is not intended to provide the long-term approach for the regulation of financial services in the UK. We can expect further, and potentially significant, legislative changes to the financial services framework after the end of the implementation period.