British banks keep having to lower their expectations for how they’ll do business with the European Union after the U.K. leaves the bloc. The U.K. government’s blueprint for Brexit unveiled July 12 dropped its demands that British-based banks retain easy access to the bloc. Instead the plan proposed settling on a framework based on one available to countries outside the EU, an arrangement known as regulatory “equivalence.” For the U.K. financial industry, the approach has significant shortcomings.

1. What is regulatory 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 a limited amount of business on its territory for such time as Nation A sees fit. Under EU law, the European Commission designates a third country’s rules and its oversight of specific businesses as “equivalent” based on assessments by the bloc’s own supervisors. The commission can take as long as it likes to do so.

2. What specifically is the U.K. proposing?

It recognizes that typical equivalence agreements don’t meet the needs of two parties as large and as deeply interwoven as the U.K. and EU. So the government of Prime Minister Theresa May is proposing that the EU grant Britain an expanded version of equivalence. For the British finance industry, a standard equivalence arrangement has huge shortcomings, the most important of which is that it’s granted unilaterally by the EU and can be withdrawn at short notice. That hardly provides the predictability and stability that businesses covet.

3. How did we get to this point?

Initially, the banks hoped to keep their so-called passporting rights to continue selling their products and services throughout the European Union after Brexit. Once that prospect dimmed, they hoped at least for “mutual recognition” by the U.K. and EU of each other’s regulations, which would have allowed the London-based banks to keep serving the EU with minimal disruption. To the EU, both passporting and mutual recognition looked like “cherry-picking” -- the U.K. trying to benefit from the good bits of being in the bloc without putting up with the obligations of membership. The U.K.’s latest proposal reflects its understanding that, post-Brexit, the EU isn’t going to allow British banks to continue operating as they have.

4. What does the U.K. industry say about the plan?

Reactions have been mixed. TheCityUK, which represents the financial services industry, angrily mourned the decision not to push for mutual recognition, as did the City of London Corporation, which manages the British capital’s financial district and called the proposal “a real blow.” U.K. Finance, which represents about 300 firms in banking, recognized the shortcomings of the existing equivalence arrangements and said the “government is right” to seek to strengthen them. The Association for Financial Markets in Europe, whose members focus on wholesale markets, said it hoped the plan “will form the basis for negotiations to progress” toward a deal that would maintain financial stability.

5. Will the EU go along with the U.K.’s proposal?

Its chief Brexit negotiator, Michel Barnier, has promised to look it over. But anything that preserves London’s role as Europe’s financial hub puts the EU in the odd position of seeing its financial center leave its jurisdiction and control. According to Simon Gleeson, regulatory partner at Clifford Chance LLP in London, the EU sees its mission in financial regulation as protecting Europe from the speculators in London and New York. He predicts it will seek to negotiate the closest supervision possible over the non-U.K. activities of British firms.

• Carney’s testimony to Parliament on “dynamic equivalence.” 

• The slides summarizing the EU’s preliminary position on regulating services in a Brexit deal.

• A QuickTake Q&A on Canada’s trade deal with the EU.

• A QuickTake explainer on Brexit.

--With assistance from Grant Clark.

To contact the reporter on this story: John Glover in London at

To contact the editors responsible for this story: Neil Callanan at, ;Leah Harrison Singer at, ;Emma Ross-Thomas at, Laurence Arnold, Lisa Beyer

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