The Importance of Brexit for the Financial Sector

Future relations between the two financial sectors of the UK and the EU became clearer after an initial agreement was reached, which outlines the frames in more detail for their future regulation after Brexit.

The two sides of the negotiations agreed that market access would be based on "equivalence", a system that determines whether regulatory standards are aligned. But it is not clear how exactly Europe will determine or apply this new mechanism, nor whether London will retain its full access to the European financial system.

The agreement is rather experimental and less binding, and more effort will be needed to finish as something specific and working. European leaders are yet to sign the agreement but also the UK and EU parliaments to vote on the terms of the main and controversial UK exit treaty.

What is equivalence? Under the equality regime, each country freely sets its standards as long as they are under the same regulations.

What is not equivalence? Currently, UK-authorized banks and financial companies can freely offer their products and services across the European Union through the so-called passport system. In turn, European regulated firms offer their services to the UK without additional aggravating procedures and rules. This system will disappear after Brexit and it will be necessary to quickly apply the equality system to preserve this activity. However, there is no guarantee that the EU will agree to maintain the conditions of the passport system and the new mechanism. Current equality conditions do not include retail banking and deposit creation.

The two sides also agreed on the need to put a specific framework around the system of equality to be properly assessed as soon as possible after leaving the UK on 29 March 2019. The aim is to complete this process before the end of June 2020. However, the equality process is yet to be standardized from its current rough appearance to a completed system with a clear legal framework and requirements.

Source: The Wall Street Journal

Photo: Pixabay

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