Thursday 13 February 2020 6:00 am

Brexit: A drawbridge to equivalence

Diehard Brexit followers will know we are making progress when politicians move from trading soundbites and references to ticking clocks to rejecting each other’s positions on future alignment and regulatory equivalence.

This week’s spat — sparked by a sneaky photo revealing the UK wanted “permanent equivalence” and answered by Barnier advising that certain people in the UK “should not kid themselves” — was actually good news.

Even though it reveals a rift, it is the beginning of a serious discussion about the equivalence regime as the only mechanism from which future relations in financial services can be built between our markets.

The parameters of this discussion are, from the EU perspective, that a country that leaves the EU cannot enjoy the same benefits as when it was a member. That much everybody had by now understood.


The EU is also adamant that a country that has left cannot be part of the EU’s decision-making process. That too should be obvious.

But what the EU is perhaps only just starting to grasp is that the UK, under this government, is not going to agree to a general acceptance of EU law in exchange for some access to the EU market.

While those in the EU still have difficulties finding any economic logic to Brexit and the UK’s loss of access to the largest integrated market in the world, it appears the UK is willing to push Brexit to its natural conclusion by foregoing market access for regulatory independence.

With both parties making legitimate claims for their respective regulatory autonomy, effectively leaving us in stalemate, all we are left with
is for any future equivalence to be deployed on a drawbridge basis
between our respective financial services industries.

Even if everyone agrees that Britain is currently aligned with most EU
law, and should therefore be granted equivalence status, it is impossible to envisage this situation not changing in the future, as either the UK adopts new regulation or the EU changes its rules with the UK deciding not to follow suit.

If that is the landscape confronting us, the objective of the impending negotiations on the future relationship should be to create a mechanism that will help manage this inevitable, even if only eventual, divergence.

While each party will remain autonomous in its decision making, there should still be an inclusive dialogue aimed at maintaining alignment.


With that dialogue would come the various benefits that flow from the equivalence regime, such as access to liquidity and lower costs.

Recognition of equivalence status would not be open for negotiation, but there would be no downside for the EU to consult and listen to the UK given the vast and sophisticated expertise found in the City.

The financial crisis showed us that cooperation between authorities from major markets is crucial, and the UK has over many years made a great contribution to shaping EU regulation because of its unparalleled knowledge.

Does the EU really want to forego that going forward? Not in my view, and if at the end of any specific dialogue, the UK decides to go its own way on regulation, it will know there are consequences through the loss of equivalence — the drawbridge will go up.

The argument heard repeatedly that no such scheme exists with other so-called third countries and therefore cannot be created is specious.
Robert Schuman and Jean Monnet did not apply the template of any preceding model of cooperation between nations when they created the European Coal and Steel Community and the European Community in the 1950s. Had they stuck to precedent the EU would likely not exist.

We were creative back then and we must be creative now. Forty-seven years of membership puts the UK in a unique category and offers enough ground to treat it differently from other countries, important as they may be. Our economies and businesses have grown deep roots over those years and that remains the case.

Agreeing to an inclusive dialogue mechanism as a cornerstone of the future relationship should not be difficult, providing there is willing on both sides of the table. Even so, the clock is still ticking…

Nicolas Mackel is chief executive of Luxembourg for Finance

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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