The EU equivalence regime in financial services: an effective instrument to preserve financial stability after Brexit?

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Francesco Pennesi

Although the UK financial sector may lose access to the Single Market as early as 31 December 2020, the EU and the UK seem miles away from a common agreement on the regulation of cross-border EU/UK financial services. One possible solution to avoid market fragmentation is to use the EU’s equivalence regime: on the basis of a European Commission decision, the UK financial sector could continue to provide certain financial services to EU clients.

The present policy brief analyses recent legislative reforms to the EU equivalence regime, and investigates to what extent equivalence is fit for the purpose of promoting EU financial stability (and competitive financial markets) in the post-Brexit context. The analysis shows that the relationship between equivalence and EU financial stability is not clear, as the former brings both benefits and shortcomings to the latter. On one hand, equivalence disincentivises UK financial institutions to relocate in the EU, forcing EU supervisory authorities to heavily rely on UK regulators to identify and manage systemic risks. On the other hand, equivalence can also be employed by the EU to influence UK financial rule-making and, following recent reforms, to supervise UK financial institutions providing services to EU clients.

The author argues that it is time for a wide-ranging reform of the EU equivalence regime, replacing the patchwork of different regulatory requirements and supervisory procedures with a single, coherent framework for all the regulated activities covered by equivalence. This would increase the international competitiveness of the Single Market for financial services, provide third country institutions with a single point of access and strengthen the supervisory powers of the ESAs and the ECB.

Francesco Pennesi is Marie Skłodowska-Curie Early Stage Researcher at the Horizon 2020 EUTIP-ITN project of the Erasmus University Rotterdam. At the time of drafting this report he was a Visiting Researcher at ECMI.