Blog: Market access: All eyes turn to equivalence question as Brexit deal is completed – Investment Week

The UK financial services industry is subject to 'third-country' rules and unable to freely sell funds into the EU

The UK financial services industry is subject to ‘third-country’ rules and unable to freely sell funds into the EU

The agreement of a Brexit deal was welcomed by financial markets in late December as sterling and UK equities strengthened in response, but the bare bones deal leaves UK asset managers in the lurch as their access to European markets remains in question.

Around 80% of the UK economy is unaffected by the deal, which primarily covers goods, with the UK financial services industry now subject to ‘third-country’ rules and unable to freely sell funds into the EU having lost so-called passporting rights.

Partner and the head of London accountancy firm Blick Rothenberg’s Brexit advisory group Alex Altmann explained that UK services are “heavily interlinked with the EU and the absence of provisions in the trade deal will mean restrictions” and “less EU market access for the UK’s services industry”.

“Firms will also face additional barriers to establishment in the EU,” he added. “They would have to comply with usually more onerous third-country rules of establishment, such as rules on the nationality or residency of directors or caps on foreign-held equity.

“The precise rules on market access would vary between EU member states and could effectively bar some UK services firms from the EU market.”

The coming months will see the UK and EU monitor each other’s regulatory developments to ensure respective regimes meet an equivalence test whereby the other jurisdiction meets their standards.

High-profile figures such as former chief executive of the Financial Conduct Authority (FCA) and now Governor of the Bank of England (BoE) Andrew Bailey have previously suggested the UK could diverge from the EU in its own regulatory standards.

However, Paul Poletti-Gadd, chief solutions officer at Broadridge Fund Communication Solutions, said the FCA, other UK regulators and their EU counterparts are unlikely to diverge substantially from existing rules, particularly in the area of regulatory reporting.

“Divergence in reporting requirements simply does not make any sense,” he explained. “Scale and efficiency rule supreme and there is no great value in creating separate reporting regimes beyond what already exists. 

“While there is likely to be a lot of noise around regulatory divergence, we predict few changes to the European fund regulations for which we support our asset manager clients.”

Equivalence and market access

With the end to cross-border passporting for firms and funds, the FCA has put in place a temporary permissions regime to allow EU-based firms to continue to access UK markets and consumers. However, the EU has not reciprocated in this regard.

Welcoming the agreement of a deal, CEO of the Investment Association Chris Cummings urged the EU “to recognise the UK’s regulatory regime as being equivalent to its own and minimise any further disruption in the market”.

City minister John Glen and senior Treasury civil servant Katharine Braddick will lead UK negotiations with the EU over the future of the UK’s access to EU markets this week, with March as a rough deadline for an agreement to be reached.

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