UK needs to maintain regulatory alignment with EU after Brexit

In an interview with the Financial Times (subscription required) Valdis Dombrovskis said the European Commission would be happy to use equivalence rules to give the UK access to the EU’s financial markets once Brexit finally takes place.

However, Dombrovskis, one of three executive vice-presidents of the Commission, said the UK should not start “to engage in some kind of deregulation”, adding that the more systemically important a financial market was, the more closely the Commission would expect it to align with financial regulations.

Financial services expert Tobin Ashby of Pinsent Masons, the law firm behind Out-Law, said Dombrovskis’s comments were notable given the imminent general election in the UK.

“Whilst this statement is unsurprising and seems simply to be timed to lay down some ground rules ahead of the possible further negotiations next year, it does emphasise the political nature of the issue,” Ashby said.

“A Brexit-supporting UK government - along with any firms not interested in EU markets - may push for a reduction in the regulatory burden on the UK’s important financial services sector. The Commission is therefore keen to set out its stance that this kind of regulatory advantage could affect access to the EU market,” Ashby said.

In a speech earlier this year the executive director of international for the UK’s Financial Conduct Authority, Nausicaa Delfas, said the regulator would be looking for equivalence with the EU on an “outcomes basis” rather than pursuing line-by-line regulatory alignment.

Dombrovskis told the Financial Times it would be simple for the UK to gain equivalence due to the fact that current financial services laws were largely implementing EU legislation. But he warned that equivalence could be withdrawn if a country’s laws began to diverge from the EU’s, or did not follow up EU legislation.

The political declarations accompanying both the original draft withdrawal agreement negotiated in November 2018, and the revised agreement in October 2019 between the UK and EU, referred to "close and structured cooperation on regulatory and supervisory matters" in the context of financial services.

Ashby said the potential for continued access to EU financial services markets had been a key focus throughout the Brexit process.

“The loose wording about ‘enhanced equivalence’ in the non-binding political declaration that accompanied the withdrawal deal was always a weak offer for UK financial services firms operating across EU borders, given the ability of the EU to withdraw equivalence even if enhanced,” Ashby said.

“If any confirmation on the EU position was needed, the Commission’s vice-president has made clear that they do not expect equivalence for UK firms to be maintained in the event of divergence of UK rules from their current EU alignment following Brexit. These pronouncements do not themselves change the expected position of UK firms post-Brexit,” Ashby said.