Even with Brexit done and a trade agreement sealed, the U.K. and European Union are still jockeying over the future of financial services. The City of London’s unhindered access to European markets -- and with that, its standing as a global financial hub -- hinges on a process controlled by politicians and technocrats in Brussels known as “equivalence.” The EU has been in no rush to move things along, while the U.K. is signaling that it intends to veer from the bloc’s rules and will not accept equivalence at any price.

1. When will the issue be settled?

That’s hard to say. Although the two sides are drawing up ground rules for cooperation in financial services by March, these will not cover market access and there is no deadline for decisions on equivalence. The EU granted two big equivalence decisions to the U.K. in 2020, but with 28 areas still open, it’s unclear how much investment banking business can stay in Britain. European Commission President Ursula von der Leyen declared in 2020 that “all will change” in the City of London’s relationship with the EU, underlining how politicians are under no obligation to maintain close ties with each other.

2. Did Brexit change much?

Yes. The trade agreement barely touched on financial services, and so firms have had to move a significant amount of business already.

• Almost all trading of EU shares on U.K. exchanges -- more than 6 billion euros ($7.3 billion) in daily transactions -- shifted to the bloc immediately after Britain completed its exit on Dec. 31, 2020.

• JPMorgan, Goldman Sachs, Morgan Stanley and other banking giants have moved hundreds of billions of euros to their new or expanded hubs in Frankfurt, Paris and elsewhere across the bloc, along with hundreds of jobs.

• Investment bankers in London now need so-called chaperones, meaning U.K.-based staff must involve EU-based colleagues when interacting with clients in the bloc on pitches, research calls and deals.

3. What is ‘equivalence’?

Generally speaking, it’s Nation A accepting that Nation B’s rules are as strict as its own and letting Nation B’s companies do certain business in its territory. For the EU, the European Commission determines whether a non-member’s rules are equivalent to its own in a given area. There’s a serious concern for the U.K. about the way equivalence works: The commission can unilaterally withdraw it at short notice. The U.K. has pressed for a longer notice period and greater flexibility, arguing for “outcomes-based” equivalence that achieves the same regulatory goals even if the wording of rules doesn’t precisely tally.

4. Have any decisions been made?

The most important for financial stability has already been granted, with the U.K. allowing European firms to continue using London’s dominant clearinghouses for derivatives, energy and metals trades. This lasts until the end of June 2022, when the EU is planning a review that could eventually force clearing business to relocate to the bloc. The EU has maintained that it’s in no hurry to grant equivalence decisions for derivative- and stock-trading or to give a broader pass to portfolio management, investment advice, underwriting and trade-execution.

5. What does each side want?

The U.K. has made clear that it will set its own regulations and may diverge in places from the EU’s approach. For instance, it’s reviewing rules that would make it easier for companies to list shares in London and is reversing a ban on trading in Swiss shares that will bring back about a fifth of the EU business that was lost. It’s also seeking to build on its role as a hub for fintech and green finance. Equivalence “is still something worth having, but it’s not worth having on any terms,” according to Bank of England Governor Andrew Bailey. The central bank has estimated that only about 10 billion pounds ($13.5 billion) of finance revenue in the U.K. relies on activities governed by equivalence rules with the EU. As for the EU, it wants to see how British regulations evolve before making any equivalence decisions and says it will protect its own interests. More broadly, the EU wants to reduce reliance on the U.K. for financial services.

6. What do bankers want?

Clarity. Banks have already shifted scores of jobs and hundreds of billions of dollars in assets from London to the EU, while asset managers including Janus Henderson Group Plc and Standard Life Aberdeen Plc are using funds in Luxembourg and Ireland for clients inside the bloc. Still, that leaves firms saddled indefinitely with the added complexity and cost of supporting operations in both London and the EU.

7. Has equivalence been withheld before?

Yes, just ask Switzerland. When talks about the Swiss relationship with the EU didn’t advance to the bloc’s liking, the commission refused to extend equivalence covering market access to the nation’s stock exchange. Swiss shares were barred from trading on EU exchanges in mid-2019.

8. So it’s an uphill struggle for the U.K.?

Yes, for both winning and keeping equivalence. Since the 2016 Brexit referendum, policy makers in Brussels have been tightening the rules. For example, the EU now has greater powers to inspect and scrutinize derivatives clearinghouses -- giving it authority over the British firms that handle the bulk of euro-denominated contracts. The commission has also indicated the U.K. can expect close monitoring if equivalence has been granted, to make sure that the two sets of rules don’t drift apart.

9. What isn’t covered by equivalence?

Core banking activities such as deposit-taking, investment services to retail clients and syndicated and other cross-border lending services. If U.K.-based banks want to continue those lines of business, they’ll most likely need to do so from offices in the EU -- hence the recent shift of some operations to Frankfurt, Paris, Dublin and other cities.

10. How many jobs are at stake?

Initial projections of a banking exodus from London, costing hundreds of thousands of jobs, proved overstated. But Wall Street banks are among firms pressing the British to secure equivalence or else see personnel shift to Europe. EY, a consultancy, said in October about 7,500 jobs are moving.

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