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BREXIT: Financial firms should lobby UK's Brexit negotiators for 'equivalence', expert says


The UK's financial services industry will have to be vocal about the rules and regulations they need to have retained in order to continue to do business with the EU following the country's vote to leave, an expert has said.

This is part of Out-Law's series of news and insights from Pinsent Masons experts on the impact of the UK's EU referendum. Watch our video on the issues facing businesses and sign up to receive our 'What next?' checklist.

Banks, insurers and wealth management firms must first identify the core requirements stemming from EU regulations and directives required for third country 'equivalence', and then lobby the government to stick to those requirements as they negotiate the terms of the UK's exit from the EU, according to financial regulation expert Elizabeth Budd of Pinsent Masons, the law firm behind Out-Law.com.

"Assuming the UK financial services industry wishes to continue to trade with the EU with the same freedoms as at present, broad equivalence with EU financial regulation will be in its best interests," Budd said.

"The UK will, of course, have equivalence on day one. Unpicking 40 years' worth of regulatory and legal evolution in the form of directly-applicable regulations, and domestic legislation in line with UK directives, is time intensive and laborious, and not necessarily in everyone's best interests overall. What we may see is a subtle divergence in regulatory requirements over time," she said.

The assumption was that the EU-level cap on bankers' bonuses would be one of the first of the existing regulatory requirements to change, given the UK's historical position against it, Budd said. The UK went as far as beginning a legal challenge to the restriction on bankers' variable pay to 100% of salary, or 200% of fixed remuneration with the agreement of shareholders, with the Court of Justice of the European Union (CJEU), the EU's highest court. It dropped this challenge in November 2014, after a legal adviser to the court advised it to reject the case.

Budd said that it remained to be seen how this change would be implemented, or the extent to which it would impact on equivalence negotiations.

However, she also pointed out that some major third countries, including the US, did not have "equivalence across the board", and that this had not prevented them from conducting "substantial amounts of business with EU-based firms".

Under EU rules, the UK will leave the EU two years after it officially gives notification of its intention to do so. In his first speech after 52% of those who voted in yesterday's referendum backed a 'leave' vote, outgoing UK prime minister David Cameron said that it would be for his successor to decide on the timing of this notification.

Bank of England governor Mark Carney said that the UK's central bank had "engaged in extensive contingency planning", and was "well prepared" for the outcome of the vote.

"The capital requirements of our largest banks are now ten times higher than before the crisis," he said, referring to the global economic conditions of 2008.

"The Bank of England has stress tested them against scenarios more severe than the country currently faces ... [The banks'] substantial capital and huge liquidity gives banks the flexibility they need to continue to lend to UK businesses and households, even during challenging times," he said.

The central bank has also set aside over £250 billion in additional funding in order to "support the functioning of markets", Carney said.

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