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People and MarketsComment

Switzerland-EU row shows equivalence will not work for UK


The EU’s decision not to extend equivalence to Swiss exchanges and Switzerland’s subsequent retaliation is a perfect example of why the measure is an insufficient framework for future EU-UK financial services relations after Brexit.

The breakdown in the relationship between the EU and Switzerland means that the shares of firms in one of the two jurisdictions cannot be traded in the other.

The impasse between the two sides is striking, given the longevity of the relationship between Switzerland and the EU. It should also serve as a warning for the UK that a future financial services relationship based on equivalence is subpar.

Financial services have been perhaps the most important sector to be overlooked in discussions between the UK and EU over Brexit.

GlobalCapital has argued before that the government should have been more ambitious in its plans for the City post-Brexit.

Financial services would benefit from the UK’s continued membership of the EU single market but failing that, a deep and comprehensive mutual recognition regime with full co-operation and a proper dispute resolution framework could have been sufficient.

Because equivalence can be unilaterally withdrawn by the EU, and also by the UK, after Brexit, it provides no certainty to investors in either jurisdiction that they can be confident of seamless trade over the medium to long-term.

The dispute between the EU and Switzerland was not primarily about financial services but a codification of the scores of bilateral agreements that govern the economic relationship between the pair.

Because Switzerland has delayed in signing the new agreement, the EU has allowed equivalence to expire.

The EU’s willingness to politicise equivalence in its disagreements with the Swiss could foreshadow what could happen to the UK in any future relationship.

The problem is that the EU might be willing to use access to its markets as a weapon in a fight over a different policy area unless the UK yielded on any particular point of contention. The European Commission allows itself latitude to consider the political aspects of a relationship when granting equivalence.

In addition, given the importance of London to European finance, a British prime minister could use market access as a weapon in the future.

Both sides have been determined to ignore financial services in Brexit negotiations, but for better or worse London will be the largest financial hub on the continent for the foreseeable future.

European investors and institutions raising capital will want access to the UK and vice versa.

For some time, equivalence has been deemed too flimsy a means to protect the continued integration of Europe’s financial markets and the Swiss episode has proved it.

The harmony of financial markets on the European continent is too important to be protected by a designation that is subject to the capriciousness of its politicians.