City of London Faces New Hurdles to EU Markets After Brexit

(Bloomberg) -- U.K. financial firms were dealt a blow after European Union policy makers agreed to tighten the rules governing the City of London’s access to the bloc after Brexit.

Under a deal reached late Tuesday, the European Commission will gain greater powers in determining who will be given access to EU clients. Representatives from the EU’s member states and the European Parliament fleshed out existing requirements for allowing firms abroad to do business in the bloc, underscoring that Britain won’t be able to stray far from EU regulations.

“In particular, the commission is charged with assessing capital requirements applicable to firms providing bank-like services,” according to a statement from the Council of the EU, which represents national governments. The toughest requirements apply when activities “are likely to be of systemic importance,” it said. London is currently the EU’s most important financial center.

At issue are the so-called “equivalence” rules that the EU has said are all the U.K. financial industry can hope for after Brexit. Under that system, officials in Brussels determine whether a country’s rules are as tough as the ones in the EU, potentially allowing firms based there to sell services in the bloc.

Officials pushing for the changes had argued that the current system wasn’t designed with Brexit in mind, and that it should be adapted to the situation. The equivalence rules under MiFID II, which open the door to a range of wholesale financial services from outside the EU, took effect in 2018.

British banks have had to repeatedly lower the expectations for how they can do business in the EU after Brexit. While U.K. officials initially dismissed the equivalence framework as inadequate, they later agreed to it when they settled on a “political declaration” that outlines the future relationship between the EU and Britain.

Tuesday’s changes apply to investment services, such as advice on mergers and acquisitions or helping clients raise capital. More traditional banking activities, like deposit taking and lending, aren’t covered by any third-country regime and require firms to set up shop in the EU to serve clients there.

If the activities by firms outside the EU would be of great importance to the bloc, “some specific operational conditions” could be attached to a decision allowing market access, the council said. The aim is to make sure that EU authorities “have the necessary tools to prevent regulatory arbitrage and monitor the activities of third country firms.”

The revisions were made as part of an overhaul of the rules for investment firms such as asset managers, brokers and proprietary trading firms. While those companies are currently all subject to the same regulations as banks, the EU is planning to introduce a more tailor-made regime, especially for smaller firms posing fewer risks to the financial system.

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