Financial services regulation and COVID-19 video diaries: COVID-19 and implications for Brexit

Hello everyone and welcome to this latest financial services video diary. My name is Simon Lovegrove and I’m the Global Head of Financial Services Knowledge at Norton Rose Fulbright.

Since lockdown we've been receiving a number of queries from both clients and contacts regarding how the COVID-19 pandemic is affecting the Brexit process.

Essentially, the pandemic has made an uncertain situation even more uncertain. In terms of the process itself, it's useful to retrace our steps and take a look back to January this year where the withdrawal agreement was finalised between the EU and the UK. The withdrawal agreement as we know contained various provisions for a transitional period and this is otherwise known as an implementation period. This would take effect once the UK had left the EU and whilst it was no longer an EU member state, the UK would still remain bound by the vast majority of EU law during the transitional period.

The transitional period took effect as soon as the UK left the EU and at the moment is due to last until the end of this year. The withdrawal agreement does provide, however, that the transitional period can be extended by mutual consent between the EU and the UK. In order for this to happen, firstly the UK and EU need to agree the terms of any such extension by the 1st July this year. In addition, any extension can't be for more than two years.

In terms of the UK’s own domestic arrangements extending the transitional period is difficult, you might remember that in January this year in legislation that the UK developed to deal with the withdrawal agreement, there was a clause inserted prohibiting any minister of the Crown from seeking the extension to the transitional period.

In addition to that, as we know, in EU exit statutory instruments, there is the term IP Completion Day. Now an extension of this transitions period is not enough to allow the UK government to simply change the meaning of IP Completion Day, instead, there has to be an Act of Parliament. So in light of this uncertain situation, firms are hoping for the best and also preparing for the worst.

In terms of the worst case planning, obviously the variety of FCA and PRA papers that were published last year through a no-deal Brexit are very instructive. In terms of hoping for the best, that is a difficult one, obviously the best case outcome would be a fully negotiated free trade agreement by the end of the year. That was always going to be a tough call and I think in light of the COVID-19 pandemic that has become even harder.

However, we have seen already the first draft from the EU of the proposed future trade agreement, that was published on 18 March and we have also seen that the UK and EU have scheduled negotiations on the document.

In terms of documents themselves, there have been another couple of things that you may have missed given the avalanche of paperwork that the regulators have published helping firms deal with the COVID-19 pandemic. For example, in March, there was a HM Treasury paper proposing new market access requirements between the UK and Gibraltar. Also there was a paper on funds and also HM Treasury confirmed that the UK would be implementing the Basel III standards, perhaps no surprise there.

Also there was a statement from the Economic Secretary to the Treasury confirming that the temporary transitional relief powers that were provided to the FCA and PRA last year would now be extended and operate for a period of time after the transitional period comes to an end.

Finally, we should say a word about equivalents. Equivalents was set out in the political declaration on the future EU/UK relationship and in that document both parties agreed to use their best endeavours to conclude their respective equivalents assessments by the end of June. At the moment, we do not know whether this will actually happen, although I have seen a Treasury letter confirming to the EU that the UK would be ready for this but it is going to be a case of wait and see.

So that is a quick Brexit round-up. In addition to tracking regulatory developments on our regulation tomorrow blog, I should just add that we are in the process of updating our client briefing note on doing business in the EU. That sets out the measures the EU 27 member states are putting in place to deal with the so-called worst case scenario.

I hope everybody is safe and well.

Bye.