Brussels looks set to lock the City of London out of European markets from 1 January, with the EU not planning on granting regulatory equivalence before the end of the Brexit transition period.
City A.M. understands the UK’s financial services firms are heading toward the default position of having to deal with individual host countries’ regulatory regimes from next year.
The decision will be a serious blow for the City of London, which wanted a fresh EU-wide deal since the UK exports around £26bn of financial services to the EU annually.
Equivalence, which gives non-EU countries access to European financial markets, is granted when Brussels rules an outside country has similar financial services regulations to its own.
Chancellor Rishi Sunak said on Monday the UK would grant equivalence to EU and EEA financial services firms, ensuring they can continue to have access to UK markets.
He also urged Brussels to make a similar decision about UK firms to maintain stability and “to reach a comprehensive set of mutual decisions on equivalence”.
However, EU sources say Sunak’s statement has made no difference to Brussels’ assessments and that the City of London will lose access to EU markets after Britain leaves the single market and customs union on 31 December.
A source with knowledge of the situation said: “The EU doesn’t have the legal mechanism to grant equivalence yet.
“It’s introducing a new equivalence regime in the middle of next year in June 2021, so they’ve effectively said they can’t look at equivalence right now even if they wanted to.”
This is in line with comments made by former European Commissioner for financial services Valdis Dombrovskis in July.
He said the UK may have to wait until next year for a decision on equivalence and in the meantime would have to deal with European countries on an individual basis.
Not all EU countries have individual regulations in place for the UK to fall back on.
Dave McCarthy, head of European Affairs at the Investment Association, said the country-by-country arrangement will be difficult to navigate for some firms.
“Without an overarching equivalence determination from the Commission before the end of the transition period, UK investment firms looking to continue serving European clients will instead need to rely on a patchwork of national licence regimes and temporary exemptions,” he said.
“These are not available in every member state, and don’t allow business to be carried out cross-border, meaning firms will need to decide whether these individual member state routes provide them with stable and predictable access post-Brexit, taking into account the location of their clients and future plans.”
Most large scale City of London banks are prepared for this scenario and have set up bases in places like Frankfurt, Paris and Amsterdam.
However, veteran Square Mile commentator David Buik said the City will still take at least half a decade to recover from the incoming changes.
“Some trading in London is going to disappear – it is going to happen,” he said.
“But there are loads of other parts of the world we can try to get a foothold in.”
A European Commission spokesperson said no decision had yet been made on equivalence for the UK’s financial services firms.
“These assessments are risk-based and proportional and evaluate whether the UK’s current and future frameworks reach the same outcomes as the EU’s relevant frameworks,” they said.
“We will consider equivalence decisions where they are in the EU’s interests.”