Third country equivalence

CRD IV does not harmonise access to the EU for third country banks. The conditions, under which banks that are not headquartered in the EU or EEA may operate within the EEA, whether by establishing an authorised branch or a subsidiary, depend on the domestic law of each member state. EU law does, however, prevent a Member State offering a third country firm better access or better conditions for access than a firm from another Member State.

A branch is not a separate legal person. Therefore where a third country branch is authorised to operate in an EU Member State it does not enjoy passporting rights. A bank would therefore have to seek authorisation from every Member State in which it seeks to operate. The rules on third country branches are not harmonised in CRD IV either, so each branch would be subject to domestic requirements of that Member State.Conversely, a subsidiary of a third country bank is a legal person in its own right and so may establish a branch or provide services under the EU’s passporting regime, but is required to be hold regulatory capital in accordance with CRD IV.

Rules designed to promote the effective mitigation of financial stability risk make it very difficult to set up a pure ‘brass plate’ operation in an EU Member State, under which the EU entity, for example, marketed its services to clients, formally routing the actual delivery through its marketing arm, but in reality upstreaming the service to the third country bank, which provided all the risk management. The EU bank will instead need to establish itself substantially in that country; to establish senior personnel with a relationship with the local regulator; and to ring-fence capital and liquidity.

Further, the rules that apply to the third country banks are also determined in part by whether the EU assesses that country’s supervisory regime to be ‘equivalent’. If the EU does consider that the third country’s regime is equivalent (as it does with the US), then a third country conglomerate, will not have to restructure its EU operations so as to enable supplementary supervision. A finding of equivalence will also determine whether EU credit institutions may treat certain exposures to third country credit institutions in the same way as exposures to EU credit institutions.

The equivalence regime under CRR/CRD IV – unlike that of MiFID II – does not allow third country banks direct market access for banking services to EU clients. As such, third country equivalence would not support continued cross-border banking activity between the UK and EU. For investment banking services, MiFID II and CRR/CRD IV, activities are frequently combined and so the limitations of equivalence mean it cannot provide a mechanism by which mutual market access is maintained. The European Commission has said that the purpose of its equivalence regimes is not to open up international trade in financial services.

Existing frameworks for how trade is facilitated between countries in this sector

The arrangements described in this section are examples of existing arrangements between countries. They should not be taken to represent the options being considered by the Government for the future economic relationship between the UK and the EU. The Government has been clear that it is seeking pragmatic and innovative solutions to issues related to the future deep and special partnership that we want with the EU.

With respect to international trade, WTO-GATS establishes the fundamentals for trade in services, including in relation to all financial services.For financial services, only limited liberalisation has been achieved in the WTO context. Conventional Free Trade Agreements (FTAs) have not provided for either comprehensive market access or deep regulatory cooperation, even though there is no structural impediment that would prevent two contracting parties to agree a more comprehensive set of provisions if they so wished.

The EU’s FTA with Canada (CETA) is a recent example of one such conventional FTA. CETA provides market access in “WTO terms” for financial services firms, meaning access cannot be subject to quantitative restrictions on size and form of investment or service provision. CETA provides investment protection for investors in financial services and includes some commitments relating to transfer of data, regulatory transparency, nationality requirements for senior managers, membership of self-regulatory organisations and operations of payment and clearing systems. However, CETA does not remove barriers related to regulatory requirements and provides only for limited dialogue mechanisms to discuss and manage these.

Across all of financial services, CETA does provide some clear commitments for provision of services in specific sub-sectors10 but this is partial. In practical terms under CETA, a European bank still requires a significant local presence in Canada to carry outextensive capital market operations and vice versa. The EU has agreed similar provisions with respect to financial services in its free-trade agreements with Korea and Singapore.

More widely in financial services, there are well-developed principles at the international level which seek to support cross-border activity and avoid duplicative regulation and fragmentation. While these principles are not especially developed in relation to retail and corporate banking, they are familiar to financial services policymakers and regulators more widely and include concepts such as deference, regulatory coherence and regulatory convergence; mutual regulatory recognition; and supervisory cooperation.