" The so called mutual recognition model has been dropped, instead access would be built on improving the EU's current equivalence arrangements."
The Government's Brexit White Paper, released today, proposes a "new economic and regulatory arrangement with the EU in financial services", confirming that the UK will no longer operate under the EU’s “passporting” regime and that it won't adopt a third country equivalence regime.
The EU's third country equivalence regimes provide limited access for some of its third country partners to areas of EU financial services markets.
However the Brexit paper says that "these regimes are not sufficient to deal with a third country whose financial markets are as deeply interconnected with the EU’s as those of the UK are".
In particular, the government says the existing regimes do not provide for 'institutional dialogue' around regulation or threats to financial stability, and don't offer sufficient tools for reciprocal supervisory cooperation, information sharing, crisis procedures, or the supervision of cross-border financial market infrastructure.
It also raised concerns around some service restrictions, noting that clients in the UK and the EU currently benefit from integrated markets and cross-border business models.
This means the government won't adopt a 'mutual recognition' of each other's regulation and will instead seek "expanded" equivalence.
Turning to the new arrangements, the government said it wanted the UK to be able to "impose higher than global standards to manage its financial stability exposure".
The paper also argued that the UK market contains products and business models that are different to those found elsewhere in the EU, "and regulation would need to reflect these differences".
The government promises that the new terms "would maintain the economic benefits of cross-border provision of the most important international financial services traded between the UK and the EU... while preserving regulatory and supervisory cooperation, and maintaining financial stability, market integrity and consumer protection".
It says the new arrangement will give each party autonomy over decisions regarding access to its market, but encompass a broader range of cross-border activities that reflect global financial business models and the high degree of economic integration.
The paper says "the UK recognises, however, that this arrangement cannot replicate the EU’s passporting regime".
Andrew Gray, head of brexit for PwC, commented: "The Government has changed its preferred course on financial services. The so called mutual recognition model has been dropped, instead access would be built on improving the EU's current equivalence arrangements.
"There are a number of issues with the EU's current approach to equivalence - most notably that it does not cover key activities such as insurance and deposit taking. Equivalence decisions can also be reversed at short notice and the process can be unpredictable at times. The Government is proposing that these issues are addressed by the EU by covering all key sectors and by making the equivalence process more predictable for businesses.
"Despite this being a credible proposal, businesses should know that there is still a risk of no deal and therefore should continue to plan for this scenario."
UK Finance chief executive, Stephen Jones, added: “The UK is currently the second largest exporter of services worldwide. Tens of thousands of customers and billions of euros of banking and capital markets services are reliant on the UK remaining Europe’s most interconnected financial centre. As the Government recognises in today’s White Paper, it’s entirely possible to use the tools and trust we have established during 40 years of membership of the EU to construct a new arrangement that preserves some of the benefits of close alignment without sacrificing political and regulatory autonomy.
"However, as today’s paper makes clear, simply relying on existing equivalence arrangements will not provide financial institutions with effective market access that enables them to serve their customers. The Government is right to want to propose a new economic and regulatory arrangement which seeks to strengthen and expand the current third country regime.
"Given the limited time available it is vital that both the UK and EU27 negotiators come to the table and focus on ensuring a legally enforceable agreement, delivering enhanced and expanded third country arrangements that enables meaningful cross-border market access in financial services. In this way firms on both sides of the Channel can continue to serve business and clients across the UK and Europe without risking financial stability.”