Brexit, the EU and its investment banker: rethinking ‘equivalence’ for the EU capital market

The EU/UK negotiations on Brexit are now imminent following the formal notification by Prime Minister May of the UK’s intention to leave the EU in the ‘Article 50 letter’ delivered to European Council President Tusk on 29 March 2017. The treatment of financial services will be a critical element of these negotiations. Prime Minister May had previously indicated in her 17 January 2017 speech on the UK’s negotiating objectives that the UK is to leave the single market and confirmed this position in the Article 50 letter. Under current EU financial law the UK will accordingly become a ‘third country’ on Brexit. UK financial firms and actors will lose the ability to ‘passport’ into the single market in financial services from the UK – unless passporting rights are preserved under any new EU/UK arrangement, an outcome which is highly unlikely. This paper considers the risks to the EU from its oft-described ‘investment banker’ becoming a third country and explores the regulatory remedies which may be available and the preferences which may shape these remedies. The paper adopts a legal-institutionalist perspective, which draws on the insights of comparative/international political economy, to examine the implications of the UK’s future status as a ‘third country’ for the EU capital market and for its current flagship Capital Markets Union (CMU) agenda. The extent to which EU regulation is transformative is contested in relation to the development of the EU capital market. But the EU regulatory regime which governs third country access to the EU capital market is likely to be a significant determinant of the strength of the EU’s capacity to absorb the loss of the UK from the single EU capital market and to contain related stability, liquidity, and efficiency risks. Drawing on international experience with access arrangements and on EU preferences and incentives, the paper considers the likely future of the current third country regime and how it might be re-configured so that third country access is based on a more secure footing.