London firms losing faith in quick-fix access to EU after Brexit
* Risks to EU market access worry London financial firms
* Hopes for quick fix hinge on equivalency regime
* Bats Europe eyes second base in another EU country
By Huw Jones
LONDON, Aug 26 Big financial groups in London
are losing faith in a quick fix to get access to the European
Union after Britain leaves the bloc and are instead drawing up
contingency plans to avoid becoming hostage to Brussels
In the aftermath of Britain’s vote to leave the EU, legal
experts said banks, insurers and asset managers in London using
so-called EU passports allowing them to sell services across the
bloc should keep their access because regulations in Britain
would be equivalent to those within the trading zone.
Foreign Secretary Boris Johnson also said in July he
expected financial firms in the country to retain rights to sell
within the EU, given the desire of European firms to have
reciprocal access to London.
But many in the City of London, Europe’s biggest financial
centre, are having second thoughts about relying on such an
equivalency fix as it will be Brussels not Britain that decides
whether the rules are the same.
Having equivalent rules is a condition for market access and
Britain would almost certainly comply on Day One of Brexit,
simply because it would have been enforcing EU-wide financial
services regulations up to that point.
But what worries financial firms is that equivalence could,
in theory, be withdrawn by Brussels at a month’s notice, which
is an element of risk some are not prepared to shoulder.
“There is not a very clear structure for how equivalence is
granted, and it’s likely to be at best a highly politicised
environment,” said Mark Hemsley, chief executive officer of Bats
Europe, the region’s biggest share trading platform.
“While on the face of it equivalence appears to be a very
attractive route because it implies very little work, when you
get down to the first level of detail there are unanswered
questions,” he told Reuters in an interview.
European heavyweights Germany and France have played down
hopes of an easy deal to keep London’s financial hub intact and
Frankfurt, Paris, Dublin, Luxembourg, Milan and Amsterdam are
all vying to woo UK-based firms that need watertight EU access.
Hemsley said barring a clear signal that Britain would have
full access to the single European market, Bats would start work
on a second base next year, with Dublin being one of the more
attractive locations in the EU.
The EU passporting arrangements have been central to Bats
success. Founded in 2005 in the United States, Bats first took
on the main U.S. exchanges before expanding to Europe in 2008.
Centred in London with an EU passport, allowing unhindered
trade across the bloc, Bats Europe has been able to snatch large
chunks of share trading from centuries-old national European
stock exchanges to become the market leader.
Other firms such as British insurers Admiral Group
and Beazley Plc have also said they may shift some
operations to Dublin, or elsewhere in the EU to have guaranteed
passporting rights following Brexit.
U.S. banking giants Goldman Sachs and Bank of America
both rely on EU passports for their London-based
European operations and have said they may restructure some
businesses when Britain leaves.
The passport so cherished by financial firms throughout the
European Union is granted under a law known as the Markets in
Financial Services Directive, or MiFID.
An updated version called MiFID II that comes in on January
2018 includes an equivalence provision for firms in countries
outside the bloc that want to do business with EU customers.
“MiFID II is critical because of the need for continuity in
global securities trading, but equivalence on its own is
unworkable,” the head of regulation at a foreign bank in London
said, referring to the lack of guarantees that equivalence would
HIGH RISK STRATEGY
The EU’s executive, the European Commission, is the body
that decides if the financial rules in a country outside the EU
are equivalent, and allow market access.
As Britain would almost certainly leave the EU after MiFID
II came into force it should be compliant initially. But if the
EU amended MiFID later, that would force Britain to make similar
changes, or risk having equivalence withdrawn.
There is no set timeline for equivalence decisions and they
not only cover countries but every firm wanting recognition from
Brussels to trade across the bloc.
“That is not a very satisfactory environment. They can just
switch you off,” Hemsley at Bats Europe said.
Besides the lack of guarantees, it could also take time for
Brussels to make a ruling, adding another layer of uncertainty
and risk. For example, it took Brussels about four years to
decide that a U.S. rule for clearing derivatives was equivalent,
and allow European banks to continue using U.S. clearing houses.
“It would be difficult to make long-term business decisions
in the hope that the UK’s laws and regulations will be deemed
equivalent to EU rules,” Vishal Vedi, banking and capital
markets Brexit lead partner at Deloitte, said.
“So, placing sole reliance on equivalence is a high risk
Bankers say the MiFID II equivalence regime could be a
stop-gap from when Britain leaves the EU until new trading terms
with the bloc come in.
The head of regulation at the foreign bank said there could
be a bilateral arrangement that includes the equivalence regime,
plus an overlay to address issues such as the short notice
period for withdrawal and future changes in EU regulation.
“It’s a choice between being some sort of rule-taker or
having some sort of bespoke arrangement, and that probably won’t
be MiFID II on its own,” the banker said.
HARD BREXIT RISKS
EU leaders have said that as a matter of principle, Britain
would only get complete access to the single market if it in
turn allowed EU citizens to work there, a condition many Brexit
Deloitte’s Vedi said this was why many banks were planning
for the World Trade Organization (WTO), or “hard-Brexit”,
scenario which assumes Britain gets no preferential treatment
and will rely on the WTO’s global system of trade tariffs.
“That is the scenario involving most change compared to the
current set up. Then they can always peel back from there,” Vedi
For now, the contingency plans are just that. For Britain to
leave the European Union, the government has to trigger Article
50 of the EU Treaty to start two years of divorce negotiations.
British Prime Minister Theresa May has said that will not
happen before the end of this year.
But when Article 50 is triggered, financial firms based in
London with business in Europe will have to make a decision,
For Hemsley at Bats Europe, that would probably mean
applying for an EU passport from a country such as Ireland, to
avoid the regulatory uncertainty that the equivalence regime,
bilateral deals or the WTO approach would all hold.
He expects others to follow suit.
(Editing by David Clarke)