EU Slaps Down UK Calls for Permanent Banking ‘Equivalence’

The UK Treasury had included the demand for so-called permanent equivalence in a draft of its opening positions for next month’s trade negotiations with the EU -- some of which were revealed in a document that was photographed as Chancellor of the Exchequer Sajid Javid carried it in Downing Street on Monday.

“Certain people in the UK should not kid themselves about this: there will not be general, ongoing open-ended equivalence in financial services,” EU chief Brexit negotiator Michel Barnier told the European Parliament in Strasbourg, France on Tuesday. “We will keep control of these tools, and we will retain the free hand to take our own decisions.”

London financial services firms’ future access to the EU is set to be a key battleground in the UK’s negotiations with the bloc. Banks are concerned that once Britain leaves the EU, they will no longer enjoy the automatic “passporting” rights that allow them to operate freely across 27 member states.

Instead, they are likely to rely on an arrangement known as “equivalence,” under which the EU would have the absolute right to judge whether the UK’s rules are adequately aligned with its own. A big concern for the finance industry is that the EU can withdraw “equivalence” with just one month’s notice -- something that could their business plans into disarray.

The document under Javid’s arm calls for a binding process “to stabilize equivalence granted unilaterally.” Yet the paper, first reported by the Financial Times, revealed the Treasury itself had doubts that the EU would agree. The EU has made clear that future access to the single market will depend on Britain committing to follow its rules.

Javid still insists that the EU hasn’t ruled out a deal on equivalence -- and the EU hasn’t either. Speaking after Barnier on Tuesday, Javid said the two sides were working closely to reach an agreement, Bloomberg reported.

“Indeed, in the political declaration, they agreed to work at speed on an equivalence decision by the end of July this year, and that’s welcome,” he told Parliament, referring to the non-binding part of the deal that accompanied Britain’s departure from the bloc on Jan. 31. He said the EU should give a minimum of one year’s notice if it intends to revoke access.

Writing earlier in the London Newspaper City AM, Javid insisted Britain will diverge from the bloc’s regulations.

“We may choose to do things in the same way as the EU if it works for the UK,” Javid wrote. “But there will be differences, not least because as a global financial center the UK needs to keep pace with and drive international standards. Our starting point will be what’s right for the UK.”

In his City AM article, Javid wrote that he wanted a “reliable equivalence process” on which “a durable relationship” can be built.

The comments from Javid and Barnier only reveal the two sides’ opening positions, which are expected to shift over the course of this year.

The document Javid held suggested potential “landing zones” could include selective equivalence, joint declarations on co-operation, and “extensive” memorandums of understanding -- at the cost of not including a chapter on financial services in the post-Brexit free trade agreement. If the industry was included in the FTA, equivalence would likely be time-limited, conditional and subject to “negative messaging” from the EU, according to the document.

The stakes are high and time to reach a deal is already running short. The UK left the EU on Jan. 31 and is now in a transitional period lasting until the end of the year, under which existing EU rules will continue to operate.

Prime Minister Boris Johnson has insisted he wants to finalize a new trade deal before the transition phase runs out on Dec. 31 and has ruled out any extension to the negotiations. If the two sides fail, the UK will crash out of the bloc and default to trading on terms set by the World Trade Organization.