With March 2019 looming, same as the possibility of a no deal case scenario for the future relationship between the UK and the EU, it is useful to refresh some of the main concepts surrounding the existing alternative avenues to ensure third country access to EU markets. Equivalence assessments by the EU Commission is possibly the most prominent one and has been already a hotly debated topic in 2018.
In fairness, we have been hearing more about equivalence assessments by the EU Commission in the recent past than we ever did since its introduction after the global crisis of 2009. In the majority of cases, equivalence assessments by the EU Commission have been cited in relation to access of UK financial service providers to European markets post-Brexit and mostly in comparison with the so-called passporting rights. This brief post aims at highlighting some of the main features of equivalence.
What is equivalence and why is it there?
The European Commission produced a working document on EU decisions on equivalence in 2017, which helps with understanding general dynamics of equivalence assessments in Europe.
Equivalence assessments by the EU Commission are one of the tools that the European Union has available to mitigate risks to the stability of its markets inherent with the exposure to foreign jurisdictions and its market participants. They were introduced to manage cross-border activities from third countries in a more secure and homogeneous regulatory environment. The aim underpinning equivalence assessments by the EU Commission is to ensure the right balance in European markets between both financial stability and investor protection, allowing European investors to still reap the rewards of a broader offering of financial services and products provided by third country market participants.
Conversely, equivalence also serves the purpose of fostering similar regulatory outcomes in the international provision of financial services, on the basis of adherence to international standards for regulation. It significantly reduces or eliminates overlaps in the supervision work of EU competent authorities.
One of the remarkable features of equivalence, which sets it apart from passporting rights, is that relevant decisions are always both discretionary and unilateral and there is no guarantee that, even though requested, such a decision of equivalence will be granted. Also, a decision of equivalence can be changed and also withdrawn by the EU at any given moment in time.
How do equivalence assessments by the EU Commission work?
It is noteworthy to mention that equivalence provisions have to be contained in the relevant European regulation and require an assessment that the third country regulatory ecosystem is equivalent to the European one. These provisions typically lay out the criteria to carry out the equivalence assessments by the EU Commission and may also confer to the EU Commission discretion as to whether equivalence should be granted or not.
The main aspects that come into play in the equivalence assessments by the EU Commission revolve around a) the legal requirements imposed in the third country being legally binding; b) the existence of effective supervision and enforcement of compliance with such requirements; c) similarity of supervisory goals to be achieved in the third country system with the ones of the EU one.
The last point is indicative of the real nature of equivalence assessments. In fact, equivalence assessments are not a word-by-word comparisons of the third country and the EU regulatory frameworks, rather an exercise to establish whether the same results in terms of supervision are attainable in the third country regulatory environment.
How is equivalence determined?
Any equivalence assessments by the EU Commission involve intensive dialogue between EU Commission and the authorities of the third countries whose framework requires evaluation and, in most cases, a decision of equivalence granted by the EU Commission is based on technical advice provided by other European supervisory agencies and takes the form of an implementing act.
The main principles that govern the equivalence assessments by EU Commission are proportionality and risk. This means that in evaluating equivalence of a third country framework, the EU Commission firstly looks at the risks that can derive from an increased exposure to the specific third country and then addresses these same risks in light of compliance of the third country with the equivalence criteria set in the relevant provisions of the EU regulation. However, the EU Commission is not limited by the risk-based approach and would typically look beyond and focus on the regulatory objectives and the supervisory outcomes achievable and pursued in the specific third country ecosystem.
The UK so far has yet to be assessed for equivalence under any of the regulation on financial services applicable. However, from a speech held on the state of implementation of MiFID II in preparation for Brexit last October 2018 by the chair of ESMA, it transpired clearly that such equivalence assessment may be a priority in case of a no deal Brexit, due to strong interconnection of the UK and EU markets and the fact that the UK played such a vital role in the EU markets so far.