EU’s equivalence under scrutiny even as Brexit looms

On Tuesday, in a statement, the Association for Financial Markets in Europe (AFME), whose members include major international banks and asset managers, have called on the European Union to make its system for financial market access more transparent and predictable in order to lessen the hurt to markets and consumers in the wake of Brexit.

According to the AFME, it was “timely” to review and improve the bloc’s financial market access regime known as equivalence.

The EU grants market access to foreign financial firms, including asset managers and clearing houses, if it thinks that their home market rules are close to regulation in the bloc.

With Brexit, equivalence has already come under scrutiny, as there is a June 30 target for the EU to assess the equivalence of Britain’s financial regulation to allow the UK’s finance industry to maintain some access to EU markets once the Brexit transition period ends in December.

Although, London-based AFME’s 14-page report directly mentioned Brexit only twice, its timing however highlights concerns over how much direct access the UK financial sector will have to the EU – its biggest export customer.

Equivalence has come under some harsh comments for lacking a transparent, predictable timetable, for patchiness in activities covered, and for how it can be scrapped at short notice.

The “lack of communication” over ending equivalence for Swiss share trading in June 2019 led to “significant uncertainty”, said AFME in its report. “Brussels should evaluate the benefits of equivalence to EU investors and not just potential risks to the bloc’s financial system”, said AFME.

“This will support continued connectivity with international financial markets, minimize unnecessary fragmentation and maximize benefits for consumers of financial services across Europe,” said AFME managing director Oliver Moullin.

With Brexit looming, bankers fear equivalence will get stuck in wider talks on a UK trade deal with an EU that also wants to build up its own capital market at the expense of London.

Already the bloc has toughened up equivalence for foreign clearing houses and investment firms in anticipation of Brexit; it will also scrutinize applications from “high impact” financial centers more thoroughly in an indirect reference to London.

Brussels has made it clear that it would always maintain its “autonomy” in determining equivalence and that it has already improved transparency, last year itself, when it decisided to scrap equivalence in the area of credit rating agencies.

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