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April 24, 2018

While addressing the audience at City Week in London, the EC Vice President Valdis Dombrovskis offered a snapshot of the work of EC toward breaking down barriers and further integrating the EU single market for capital. He also discussed how EC can manage the risks related to Brexit.

With regard to the work on Capital Markets Union (CMU), he stated that, “… we have made it cheaper and simpler to raise capital on public markets with our new Prospectus Regulation. And we have agreed on a new framework for Simple, Transparent and Standardized securitization.” Other proposals include the proposal for a Pan-European Personal Pensions Product that would help to put to more productive use, the savings that currently lie on low-interest rate accounts. The goal is to have in place the building blocks of CMU by 2019. He then discussed the two types of risks associated with Brexit:

  • The first risk is linked to the remaining uncertainty on the withdrawal agreement. EC has reached an agreement on a joint legal text that covers large parts of the future withdrawal agreement, including a transition period until December 31, 2020. However, important negotiation issues still remain to be dealt with before the agreement can be finalized, such as the Irish border and the governance of the withdrawal agreement. “As Vice President in charge of financial stability, my message to all parties—firms and supervisors—is that they need to continue their work to prepare for all scenarios,” said the EC Vice President. He added that the current discussions confirm that companies can alleviate the main risks by repapering contracts and adapting operational models.
  • The second risk is linked to the future relationship with the UK. Until now, the UK and the other EU member states have managed risks jointly by setting common rules and the European Court of Justice has guaranteed that they are enforced against operators from all member states. Therefore, countries are willing to accept that operators from across the EU export financial services—and also risks—into their territory, without supervising those operators themselves. With Brexit, the UK will move away from this system. Consequently, each side will have to set and implement its own rules to protect investors and ensure financial stability. 

However, EU has a long history of relying on the regulation and supervision of third countries via equivalence. EU has over 200 equivalence decisions benefiting over 30 non-EU jurisdictions. EU’s risk-based approach and proportionate application of equivalence means that it can work for third countries with different levels of interaction with the EU financial system. “The EU27 Member States recently recognized this in a statement when discussing the future relationship with the UK. They also reiterated their support to build on and further improve equivalence. And that is what we are currently doing.” Despite the improvements, there are some clear limits to equivalence. First, equivalence decisions are, and will, remain unilateral and discretionary EU acts. Second, equivalence rules do not cover all parts of the financial sector. Third, equivalence is only possible if there is a close convergence of rules and supervision. If the EU and a third country should happen to go different ways, the conditions for equivalence would fall. This means that equivalence may be changed or—as a last resort—withdrawn. To make this less likely to occur, supervisors must work together. In conclusion, he added: “equivalence is not perfect, neither for firms nor for supervisors. But one should not make the perfect be the enemy of good. Equivalence has proven to be a pragmatic solution that works in many different circumstances, and it can work for the UK after Brexit as well.”


Related Link: Speech

Keywords: Europe, EU, Securities, Brexit, Passporting Regime, Equivalence, Capital Markets Union, EC

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