Brussels will this week strip five countries of some market access rights, in a move set to heighten British fears that the system the City of London will rely on to serve EU customers after Brexit fails to offer a stable and permanent regime because it can be withdrawn.
According to a document seen by the Financial Times, the European Commission will deem that Canada, Brazil, Singapore, Argentina and Australia no longer regulate credit rating agencies as rigorously as the EU does, removing a status that made it possible for European banks to rely on those ratings.
The move marks the first time that such access rights, known as equivalence provisions, have ever been withdrawn, although some temporary permissions for Switzerland were allowed to lapse earlier this year.
About 40 equivalence provisions are scattered throughout different EU financial regulations and are intended to make sure that trading platforms, brokers and other companies based in non-EU financial centres can serve European clients, so long as they are subject to strong regulation and supervision. The provisions are used by more than 30 countries.
Valdis Dombrovskis, the EU commission vice-president in charge of financial regulation, told the FT that the decision on rating agencies set “some kind of a precedent for monitoring adherence”.
“We had extensive dialogue with those countries, so they knew there was an issue and they knew there may be consequences,” he said. “If they, during several years, chose not to update their legislation, then we had to take the decision to withdraw equivalence.”
Brussels has insisted the UK will have to rely on equivalence for market access after Brexit, when the financial sector will lose the right to seamlessly offer services across the single market. The EU rebuffed attempts by Theresa May, the former UK prime minister, to secure a more comprehensive and permanent access regime.
Mr Dombrovskis signalled that UK fears were unfounded because the process showed how careful the bloc was about curtailing access, noting that the EU had waited six years to act. “We are doing so after a long process and actually a long negotiation which lasted several years,” he said.
The move relates to EU legislation from 2013 that reflects the bloc’s frustration that agencies such as Standard & Poor’s and Moody’s deepened the sovereign debt crisis by downgrading countries such as Greece and Portugal at sensitive moments.
The law restricts when such decisions can be published and sets ownership rules for rating agencies that are intended to prevent conflicts of interest. But few other countries have followed Europe’s lead.
The equivalence provisions in the law mean that an agency’s ratings can be used for regulatory purposes in the EU, notably by banks when they measure the risk of losses on investments and so how much capital they need.
EU officials stress that equivalence is not the only access regime that the EU offers for rating agencies. A separate scheme, known as endorsement, allows individual agencies to get access by setting up units in the EU that vouch for ratings produced elsewhere.
Zulema Aragonés Monjas, head of European compliance at DBRS, a Canadian rating agency, told the FT: “The European Commission decision to repeal equivalence for Canada will have no impact on our business.”
“We’ll continue to issue ratings from our US and Canadian credit rating agencies that can be endorsed by our EU registered CRAs and therefore used for regulatory purposes in the EU,” she said.