Brexit's enhanced equivalence isn't dead. It was never alive

If you're already feeling pessimistic about the City of London's future after Brexit, you might be feeling even more so following the Financial Times' sighting of the EU's "staff working document" on equivalence rules.

Equivalence is the current last hope for banks in London that want to access EU markets after April 1919. Existing passporting arrangements are out of the question if Britain leaves the European single market. 'Workarounds' like reverse solicitation (claiming that banks in London were approached by clients in the EU rather vice versa) or 'dual hatting' (booking trades in the EU and executing trades in London) have been rejected by banks and regulators respectively, Equivalence is all that remains.

Loosely, equivalence means banks in the UK will be able to operate in the EU if relevant financial regulations in the two jurisdictions are deemed the same by the EU's assessors. Unfortunately, equivalence can be withdrawn within 30 days and is open to manipulation for political purposes.

What banks and the British government really want, therefore, is 'enhanced equivalence' or 'equivalence plus.'  Here, in the words of Alex Wilmot-Sitwell, president of Bank of America in EMEA, equivalence would go, "hand-in-hand with a shared regulatory response…a harmonized approach to regulation…" and would be "thought through on a long term basis.” Put simply, the EU wouldn't have the final word on equivalence and it wouldn't be removable at short notice.

Unfortunately, it's this superior equivalence that the staff working document spotted by the FT seems to categorically reject: the Financial Times says the document expresses Brussels' determination to perform “continuous follow-up monitoring” itself to make sure equivalence still holds and that Brussels wants to withdraw equivalence at any time if "contrary developments" are identified. Doom.

Brexit watchers aren't as perturbed as might be expected though. Most see enhanced equivalence as a British fantasy.  “Enhanced equivalence would be likely to require changed legislation and that takes a lot of time," says Peter Snowdon, a partner in the regulatory division of law firm Norton Rose. "I don’t honestly know how we could get there in the time frame available."

"Enhanced equivalence is a long term aspiration," says William Wright at think tank New Financial. "The notion is that regulators and supervisors across Europe come up with a broader model involving enhanced regulatory cooperation across Europe, even though the UK is no longer part of the EU. It makes a lot of sense for the UK on paper, but it's entirely theoretical." Wright points out that the EU's working document appears merely to be referring to the current equivalence model: enhanced equivalence isn't even on the table.

Where does this leave London financial services jobs? In exactly the same position as before, is the answer. Banks in London are still making Brexit contingency plans and hiring in London is still subject to an, "unprecedented level of scrutiny," in the words of recruitment firm Morgan McKinley.

Even so, Wright points out that only 20% of London banking jobs will be directly impacted by the end of passporting, suggesting the City will mostly carry on as previously post-Brexit. Snowdon is more fatalistic: "Our experience would suggest that a higher proportion than 20% of UK jobs are dependent upon passporting. But this may simply be because the firms seeking advice from us are the ones which have business models that rely on cross border activity," he says. "Even so, I suspect the figure could be higher because of the secondary business that flows from that 20%.”

Contact: sbutcher@efinancialcareers.com