The negotiations between the EU and the UK on their future relationship agreement have always been difficult. The recent announcement that the UK government would disregard parts of the Withdrawal agreement and thereby commit the unthinkable for a respected member of the international community – breaching international law – has made things worse.
The repercussions are far reaching for the financial sector and a number of hoped for third country equivalences for the UK. The European Commission has always voiced its concern that the United Kingdom would water down its legislation or parts of it for competitive reasons. That concern has been supported by the messages form the UK, constantly hinting at divergence and that legislative sovereignty was a key driver behind Brexit. Now, on top of these comments, the UK faces a fundamental trust issue. Indeed, any UK stability commitments will now be taken with a pinch of salt. After all, the reasoning goes, if they are ready to breach international law what prevents them from breaking a simple promise?
The prospects of generous equivalence decisions have been unlikely for quite a while, but now seem more distant than ever. Although the Commission has finalised its equivalence assessment of the UK in financial services, officially no decision has been taken yet. This is not unusual, as the political link to the ongoing EU-UK negotiations on the relationship agreement is obvious. But the political climate has deteriorated. It is largely understood that the Commission is not ready to give a long sought-after article 47 MiFIR equivalence on investment services. Other potential equivalence decisions are hanging in the air awaiting the result of the negotiations on the EU-UK agreement. Right now, nobody is willing to give up neither hope nor efforts. A no-deal scenario is still plausible, although not inevitable. But the financial sector needs to be ready for such an outcome. The new element is that the number of equivalence decisions might be more reduced than could have been expected only a month ago and time is quickly running out with the October deadline looming.
There is one positive though: on 21 September the Commission issued a temporary equivalence decision for UK CCPs (Central Counterparties) given the impact such a cliff edge would have on the EU itself. The decision will apply as of 1 January 2021 and will expire by 30 June 2022.
By Antoine Kremer