On 9 February 2023, the European Parliament published a study on recent trends in UK financial sector regulation and possible implications for the EU, including its approach to equivalence.

The study summarises and discusses recent trends in financial services legislation and regulation in the UK, divergence between the EU and UK and threats from this divergence for financial stability in the EU

Some of the key findings are as follows:

  • The UK approach to regulation will lead to the transfer of most rules from statutory level to the regulator’s rulebook, which will fundamentally reinforce the regulatory and supervisory model set by the Financial Services and Markets Act from 2000.
  • The UK has replicated a number of trade agreements between the EU and third countries; it has also concluded several new ones, while others are under negotiation. The Free Trade Agreements with Australia and New Zealand include non-discrimination rules to ensure the fair treatment of financial services provided in the other parties’ markets and the free flow of financial data subject to privacy, personal data protection and public policy exceptions. Both of these as well as the Free Trade Agreement with Japan contain arrangements for regulatory dialogue, in the form of either a forum or a working group.
  • The UK has also signed a Digital Trade Agreement with Singapore and concluded one with Ukraine, as well as a Mutual Recognition Agreement concluded with Switzerland.
  • There are several areas where the UK has already taken initiatives that could result in regulatory divergence, in particular from the EU Single Rulebook in banking and financial regulation. For example, proposals for the implementation of the final Basel III reforms differ between the UK and the EU, with the latter deviating from the Basel III agreements with consideration for proportionality concerns.
  • Both the UK and the EU are considering reforms of the Solvency II regulatory framework for insurers with the objective of fuelling more equity investment by insurers, but through different regulatory adjustments. The UK aims at reforming different aspects of its wholesale markets regime and capital market sector, though these reforms are considered low impact.

The study discusses three possible scenarios of divergence although it accepts that which scenario will actually materialise is almost impossible to predict:

  • Low divergence – there will be adjustments to some UK regulations as well as other initiatives in line with increasing the ‘competitiveness’ of the UK as a financial centre, but there will not be major divergence, especially in areas with international standards, such as bank capital regulation.
  • Medium divergence – there will be more significant divergence and fewer attempts to converge on new rules such as in the area of green finance or crypto asset developments.
  • High divergence – there would be a rather aggressive legislative and regulatory drive in the UK to diverge from EU rules. This would involve both replacing existing EU rules with new regulation and adopting divergent rules where such rules were not inherited. The EU expects such aggressive divergence especially in areas where UK authorities see growth opportunities and feel less constrained by international fora and cooperation initiatives, such as crypto.

The study also covers the types of equivalence (in general) and potential scenarios for future equivalence granted to the UK. The EU may adopt different types of equivalence:

  • Scope-limited and time-bound equivalence.
  • Scope-limited, also called partial equivalence.
  • Conditional equivalence.
  • Provisional equivalence.

The study adds that more generally, the granting of equivalence to the UK is likely and feasible for only a few financial sector segments and critically dependent on the broader political relationship between the EU and the UK, strongly related to the stand-off over the Northern Ireland Protocol.