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And even if finance gets a #Brexit deal, equivalence is not the answer

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Following yesterday’s discussion of Brexit and it’s implications on financial services, there’s a little more to be said on this.

For example, every year at The Financial Services Club, we are delighted to host our friend David Doyle who, with precision-based analysis, talks us through the implications of EU Regulations on the Financial Markets of Europe. In recent years the discussion has obviously narrowed in focus towards the implications of Brexit and the City. Most of that dialogue has then narrowed further around a regulatory agreement called ‘equivalence’.

What is equivalence?

An equivalence agreement refers to a financial services agreement negotiated between the EU and a third country, which recognises the regulations of the third country as in compliance with, and therefore equivalent to, the EU’s own. This recognition allows firms from both the EU and the third country to operate within the territories of both.

According to the European Union, this brings benefits to both parties:

  • it allows authorities in the EU to rely on supervised entities' compliance with equivalent rules in a non-EU country
  • it reduces or even eliminates overlaps in compliance requirements for both EU and foreign market players
  • it makes certain services, products or activities of non-EU companies acceptable for regulatory purposes in the EU
  • it allows less burdensome prudential regime to apply to EU banks and other financial institutions with exposures in equivalent non-EU countries

In theory.

In practice, this looks like a seriously wobbly route to follow. For example, last summer the Swiss, who follow an equivalence regime, were thrown out of Europe for being unequivalent. Last month, a lobby group for The City issued research that shows that equivalence will lead ot a possible new financial market where the UK are just rule-takers and no longer rule-makers or even rule-shapers.

The 42-page International Regulatory Strategy Group (IRSG) report is titled:

The architecture for regulating finance after Brexit: Phase II

Here’s the Executive Summary:

This is the IRSG’s second report on the framework for regulating finance after Brexit. A key element of the first report, published in December 2017, was to propose principles for assessing the effectiveness of the regulatory framework including regulatory independence, regulatory accountability, coherence, flexibility, and clear and appropriate regulatory objectives. These were used to develop recommendations which analysed how to strike the balance between competing regulatory objectives and ensure ongoing consideration of broader public policy objectives.

Since December 2017, there have been some significant Brexit-related developments, including:

  • The passing of onshoring legislation which established the approach to identifying which UK bodies would mirror the various EU institutions, and transferring powers to those bodies accordingly.
  • Changing expectations about the future UK-EU relationship, with the Political Declaration noting that a future agreement would reflect the UK’s and the EU’s regulatory and decision making autonomy.

Other changes since the first report which add impetus to this second report include:

  • A renewed focus on the UK’s regulatory architecture with various actors in the public sector having spoken about the future of financial regulation in the UK.
  • The broader social and economic context in which financial services operate has evolved, with an increasing focus on financial services’ role in promoting sustainable business and on technological innovations in the delivery of financial services. These require a regulatory framework which enables a flexible, innovative and agile response from those involved in the development of public policy and financial regulation.

Against that backdrop, the IRSG continues to view the principles it set out in the original report as the right ones to guide thinking about the future regulation of finance in the UK. Likewise, many of the original recommendations remain valid. Nevertheless, the IRSG considered that it was appropriate to refresh the original report and bring it up to date to reflect current circumstances. This report therefore reviews and updates both the principles and the recommendations based on those principles and sets them in the current context.


The UK’s current regulatory framework does not have the same level of resource, specialist mechanisms or scrutiny as exist within the European system.

To ensure the UK regulatory system is effective, robust and capable of taking a flexible and innovative approach to rulemaking while striking the right balance between different public policy considerations, we must develop a framework that appropriately balances:

Regulatory independence

Our regulators must be independent and free from undue political and business influence. They must act in the pursuance of their publicly stated roles and objectives. This provides certainty which is crucial for the UK’s role as an international financial centre, encouraging investment into the UK and assuring firms they are competing on a level playing field. Where financial regulation is given a role in pursuing broader social objectives, there must be transparency about this mandate. In responding to the opportunities and challenges of innovation, regulators should maintain impartiality between business models.


Regulators will need to respond to market developments and innovations swiftly. Along with responding to technological and ethical challenges, regulators will need to consider their objectives in the context of consumer and political demands. Flexibility will also be needed to tailor regulation to a specific market. Flexibility in this sense should be distinguished from regulatory or legislative churn and principles-based regulation as it can also be compatible with detailed rulemaking. Consideration of how the UK might exercise flexibility must also include recognition and scrutiny of approaches to broader international regulatory alignment (including with the EU). To ensure appropriate flexibility, it is necessary to reassess the post-onshoring division of powers in the UK regulatory architecture.


Regulators must be accountable and subject to appropriate levels of scrutiny. Accountability involves regulators being subject to defined standards and there being mechanisms to ensure there are appropriate remedies if they do not adhere to these standards. Scrutiny involves the regulators being subject to observation and examination from outside bodies. In applying these, it is important to note that accountability and scrutiny are relevant in relation to both the exercise by regulators of policymaking powers and their supervision of firms and individuals. Post-Brexit, additional domestic mechanisms and controls will be needed to ensure government and regulators’ policymaking decisions are subject to scrutiny and are held accountable.


The respective competencies of the UK regulators should be clearly demarcated to avoid regulatory overlap, a lack of consistency in how they balance competing objectives and critically, facilitate regulatory coordination. To maintain the UK’s pre-eminent position as an international financial centre, it must ensure its domestic framework is consistent with international standards. On leaving the EU, the responsibility for maintaining a coherent regulatory system will rest entirely with UK policymakers. The ongoing development of the division of responsibilities for legislation following the onshoring process will require a carefully articulated and transparent process. Coherence should also be a principle governing the textual sources and format of financial rules, which have been complicated by the Brexit onshoring process.

Appropriate regulatory objectives

UK regulators should continue to be guided by a small number of clear and appropriate objectives that produce intended outcomes, are coherent and comprehensive and, when considered together, flexible enough to adapt in light of technological or market developments. If regulators are to have additional public policy objectives within their remit they must consciously and transparently balance those against the rest of their remit. Sustaining and promoting an environment where financial services can flourish in their global context should be made a secondary regulatory objective. This would ensure the UK financial sector is not disadvantaged compared to the rest of the world and that customers of that sector (including domestic consumers) can access the best financial services in the world and realise the full benefits of innovation.


Powers and resources of the regulators

Redistribute powers to amend onshored regulation to achieve consistency in the UK’s existing regulatory architecture.

Following the onshoring process, the UK should assess the allocation of powers in its architecture based on existing institutional arrangements to ensure consistency between onshored regulations and the existing rule book. The overarching principles, broad parameters, powers and constraints should be set in primary legislation and, once established, resources should be allocated accordingly to make the most of rulemaking expertise and ensure flexibility of the regulatory system.

Framing the responsibilities of the regulators

Provide a formal role for international financial standards within the regulatory architecture.

Given the growing importance of global standards for financial regulation and the UK’s desire to help shape and spread those standards into the future, it may be appropriate to refer to them in a new regulatory principle under Financial Services and Markets Act 2000 (FSMA).

Regulators would need to take into account, where appropriate, international standards that have been developed by consensus when discharging their regulatory functions, and to actively promote their adoption on the international stage. This would ensure a continued focus by the UK regulators on maintaining their leading role in shaping these standards and encourage other desirable outcomes, such as continued structured cooperation with both EU and other regulators.

Clarify roles and responsibilities in meeting public policy objectives.

Enhanced roles for Her Majesty’s Treasury (HMT) and Parliament in coordinating public policy objectives with the financial regulators would ensure that financial regulation is integrated into a wider public policy context.

Reflect the need to maintain and enhance the financial services ecosystem in regulatory objectives.

Sustaining and promoting an environment where financial services can flourish in their global context should be made a secondary regulatory objective. This should be distinguished from a drive for lower standards which could allow excessive risk to develop within the financial system. The sector does not want a regulatory race to the bottom but attaches importance to promoting the competitiveness of the UK.

General accountability and scrutiny of the regulators

Strengthen mechanisms for scrutinising and holding regulators and HMT to account.

Due to the loss of the need to comply with EU law and peer review from other EU financial regulators and the European Supervisory Authorities (ESAs), we recommend the establishment of a Parliamentary committee with a mandate specifically focused on the regulators and with formal mechanisms to ensure regulators regularly report to it on the exercise of their functions, and to allow systematic and constructive scrutiny of their activities. This should be appropriately staffed and resourced.

Increase transparency of decision making by HMT and the regulators to improve scrutiny.

To ensure appropriate scrutiny, decision making by HMT and the regulators must be sufficiently transparent. Transparency mechanisms should therefore be reconsidered as part of the UK’s post-Brexit regulatory architecture.

Enhance engagement with and the role of the Law Commission and other legal expert groups.

HMT and the regulators should more actively engage with the Law Commission to consider legal issues such as the appropriate review and consolidation of financial services legislation and related common law. This will help address the need for additional scrutiny of the regulator’s legislative functions.

Strengthen the role and visibility of statutory panels.

We recommend the PRA and FCA actively consider whether their statutory panels could be strengthened and made more prominent in ensuring appropriate scrutiny of the regulators.

Legislative and regulatory processes

Consolidate financial regulation to improve accessibility.

A consolidation exercise should be considered to improve the accessibility of the law and lower compliance costs, by making it easier to locate specific regulatory requirements within the legal framework.

Establish mechanisms to track regulatory developments which could affect trade negotiations.

Mechanisms should be put in place to track domestic and international regulatory developments which may jeopardise market access, as well as tracking measures that may jeopardise equivalence with the EU. The impact of regulatory developments on trade negotiations should also be considered.

Make review mechanisms mandatory.

A formalised process should be put in place to review new rules or legislation within a set time frame to ensure they are relevant and appropriate for their desired outcomes.

Establish a Financial Regulatory Policy Committee.

We recommend the establishment of a Financial Regulatory Policy Committee with specialist sub-committees and representatives of the full range of stakeholder interests to scrutinise regulatory cost-benefit analyses. It should also review the content of regulatory proposals with the potential for a role in any legislative review mechanism.

Establish a Joint Regulatory Committee.

When the UK leaves the EU, it will no longer be subject to the ESAs’ Joint Regulatory Committee, and there is currently no UK domestic equivalent. We recommend the establishment of a permanent committee of relevant UK regulators tasked with ensuring regulatory coordination and coherence.

Chris Skinner Author Avatar

Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog,, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...

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