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Commission sets out its equivalence policy with non-EU countries

July 29, 2019

On July 29, 2019, the European Commission issued a communication setting out its overall approach to equivalence and recent legislative developments in terms of how the Commission grants equivalence to non-EU countries. It also describes how the Commission and the European Supervisory Authorities monitor the situation in those non-EU countries after equivalence decisions have been taken. The Commission also sets out an updated web page concerning the equivalence decisions it has already made.

Key points the Commission makes in its communication include:

  • the equivalence process is primarily a risk management exercise. It invariably involves managing any risks associated with the cross-border activity of market participants, while exploiting the benefits of an open and globally integrated EU financial market;
  • it is the Commission’s responsibility to ensure that – whenever a new decision to rely on third country rules or supervision is considered – the prospective benefits do not come at excessive risk (and cost) to the EU financial markets and that they can be introduced in a prudentially sound way that respects the level-playing field in the EU internal market;
  • while equivalence decisions are unilateral and discretionary acts of the EU, they bring benefits to both the EU and its third-country partners. This mutually beneficial outcome relies on equity and fairness in the treatment of EU players active in third countries and subject to local rules and supervision. In this respect, some categories of equivalence decisions are taken after due consideration of the treatment that the third country affords to the EU regulatory framework, to the supervisory work performed by EU authorities and to the local presence of EU market participants. In a number of cases, the design of the EU equivalence framework encourages exploring mutually accommodating outcomes with third countries, for example, putting in place supervisory cooperation arrangements;
  • an equivalence decision is a unilateral and discretionary act of the EU, conducted and concluded by the Commission, in accordance with the EU’s priorities and the interests of EU financial markets;
  • the Commission attaches utmost importance to taking a proportionate view on the risks implied by the third-country frameworks under assessment. The focus on risks in this process implies that, as a rule, “high-impact” third countries, for which an equivalence decision is likely be used intensively by market participants, will represent a more significant set of risks which the Commission will need to address in its assessment of the equivalence criteria and in the exercise of its discretion. If there were to be shortcomings or gaps in the equivalence assessment of such third countries, these would likely have a negative impact on financial stability or market integrity in the EU;
  • the equivalence assessments of third-country frameworks look at the outcomes of third-country regulation and supervision, while taking into account the risks related to the third-country financial system. Third-country regimes do not need to be identical to the EU framework, but they do need to ensure in full the outcomes as set out in that framework. In that respect, the risk-sensitive approach may lead the Commission to consider specific issues of third countries under assessment, for instance the fact that EU firms extensively rely on operators regulated and supervised in a third country under assessment. Proportionality in the application of the criteria may result in the EU expecting stronger assurances from high-impact countries that they are able to deliver the required outcome;
  • as part of its discretion, the Commission may decide to formally adopt, suspend or withdraw an equivalence decision, as necessary. Depending on the circumstances, such decision can take effect after a possible transition period, applicable to the full decision or to parts of it. If withdrawn, equivalence could be restored at some subsequent time if and when all necessary conditions were met; and
  • third countries may express an interest in being assessed, which the Commission will duly consider. It should be noted that equivalence empowerments do not confer a right on third countries for their framework to be assessed or to receive an equivalence determination, even if those third countries are able to demonstrate that their framework fulfils the relevant criteria. Similarly, while in many cases the EU is adhering to international standards, and a third country’s adherence to international standards will be an important factor, this does not mean that the Commission would automatically find that country EU equivalent in a specific area.

The Commission also announces that it has:

  • adopted equivalence decisions for financial benchmarks administered in Australia and Singapore;
  • extended existing equivalence decisions in the field of credit rating agencies for Hong Kong, Japan, Mexico and the United States; and
  • repealed existing equivalence decisions for the first time. These were in the field of credit rating agencies for Argentina, Australia, Brazil, Canada and Singapore.

This briefing also features as a post on our Financial services blog: Regulation Tomorrow.