A Closer Look at the UK Equivalence Framework for Financial Services
Neutralising one of the most dreaded implications of Brexit is not a fantasy anymore. The UK EU Memorandum of Understanding on Financial Services has been finally signed by both parties. The recent news sparked enthusiasm again in the UK financial services industry. And the most immediate way to look at this development is in light of the possibility to restore access for UK market participants to investors across the single market in Europe, based on forthcoming equivalence decisions by the European Commission. No more reverse solicitation theories nor tied-agent arrangements. This is looking at the issue of equivalence from the outbound perspective.
There is another side to equivalence, much less talked about but not less important. That is what we can define inbound equivalence. Introduced as part of the UK equivalence framework on financial services and incorporated already within the new UK overseas fund regime, in advance of Brexit UK authorities introduced their own equivalence assessment. This UK equivalence regime will govern, amongst the others, access of EU and EEA retail funds to the UK market.
Get in touch here with your contacts at Veneziano & Partners to see how we can help with the UK Equivalence Framework for Financial Services.
The UK Equivalenvece Framework and the European Union Withdrawal Act
The genesis of the UK equivalence framework for financial services lies in the work related to the European Withdrawal Act 2018.
By way of oversimplification, the work related to onshoring EU law into UK law in advance of Brexit also included the introduction of powers for UK authorities to make equivalence determinations on financial services as well as the conversion of existing equivalence and exemption provisions already granted to third countries at EU level. For this to be technically possible, the UK had to introduce its own equivalence regime.
Where at European level the European Commission is the leading actor in the process of equivalence determinations, the corresponding role in the UK has been taken on by the HM Treasury. And where the European Commission is supported by the European Supervisory Authorities in the equivalence determination process, the Prudential Regulatory Authority, the Financial Conduct Authority and the Bank of England will be responsible for assisting the HM Treasury for all the matters related to their regulatory functions.
The UK equivalence framework for financial services is part of a broader set of tools that the UK government can deploy to support the openness of its financial markets and foster going forward international cross-border market access, including Free Trade Agreements, Mutual Recognition Agreements, Financial Dialogues etc.
A UK Centric Process
The process to reach an inbound equivalence determination is essentially UK centric. There must be specific reasons and pressing group interests for the HM Treasury to decide to initiate the assessment of equivalence for an overseas jurisdiction. Any approach by the HM Treasury in this sense will be based both on relevant stakeholders’ representations and the specific interest that UK firms, within a specific sector, might have in that overseas jurisdiction. Once an interest of a specific group in an overseas jurisdiction has been ascertained, the HM Treasury will typically initiate the dialogue with the representative of overseas jurisdictions. Overseas jurisdictions remain at liberty though to express interest with the HM Treasury to be assessed for inbound equivalence. The priority or relevance of any such interest so expressed by any overseas jurisdiction will be dealt with in accordance with the relevant UK internal process.
The regime for inbound equivalence is already preset within strategic pieces of EU law as onshored in the UK. As we saw already, the process for inbound equivalence is part of the new UK Overseas fund regime. Within the paradigm of inbound equivalence, we will always find that there is a specific legal requirement that needs to be met for a positive equivalence determination to be granted. If we look at the case of the overseas fund regime, we see that this requirement is represented by the equivalent investor protection test. In simple terms, the protection afforded by the local laws and practices to the participants in the overseas funds must be equivalent to the protection afforded to the participants in comparable UK schemes. Where the comparable authorised schemes are clearly defined in the legislation, the concept of equivalent protection remains to be discussed.
Once a positive equivalence assessment has been reached, with the HM Treasury being satisfied that the overseas jurisdiction at issue is equivalent on an outcome basis – meaning in the principles and outcomes of investor protections rather than the actual means – equivalence determinations will take the form of secondary legislation. That is Statutory Instruments, accompanied by explanatory memorandums to detail the type of advice received by the HM Treasury, approved in accordance with the normal legislative process in the UK. Once the parliamentary process is completed, overseas firms will be able to register in the UK – EEA and EU retail funds in our case – following the process that is established by the specific legislation of reference.
It is a fair conclusion to state that sufficient progress has been made to make sure that equivalence can be used as a tool for cross-border access both to the EU and UK markets. A different question though is when this will become a reality. Nobody has a clear answer to that.
For what concerns namely the access of EEA and EU retail funds to the UK market, we believe that the whole paradigm of equivalence, as introduced under the UK overseas fund regime, sets a completely different backdrop for the evaluation of equivalent investor protection. The outcomes-based nature of equivalence, in our view, divorces the related assessment from the requirement to have exactly the same means, rules and remedies in any jurisdictions to pursue the common principle or interest, eliminating the obstacles that might still exists today for a recognition of EEA or EU retail funds under article 272 FSMA.
Get in touch here with your contacts at Veneziano & Partners to see how we can help with UK Equivalence Framework for Financial Services.