The Brexit trade deal: What it really means for financial services

On Christmas eve, the UK Government and the European Commission (Commission) announced that they had reached agreement on a free trade agreement. The deal, covering a collective market worth $905 billion in 2019, is covered  in a 1,246 page EU-UK Trade and Cooperation Agreement (Agreement) which now has to be approved by all 27 EU countries and the UK and European Parliaments. Given that there are only a few days left until the end of the Brexit transition period on December 31, the European Parliament is expected to vote retrospectively in January. In the UK, the Speaker of the House of Commons has granted a request from the UK Government to recall the House on December 30, 2020 to debate legislation to give effect to the Agreement in UK law.

As expected, the Agreement says little about financial services and does not provide market access in the form of positive equivalence determinations. This has been well trailed and for those following the negotiations it became apparent that for the financial services industry a deal would in many respects resemble a no deal scenario. This has been on the basis that the Commission made it clear from the very start that the continuation of passporting was off the table and a Commission communication published in the summer put the UK on notice that equivalence determinations in a number of areas would not be adopted in the “short or medium term” and that these were unilateral decisions of each party and not part of the negotiations.

Where financial services are mentioned in the Agreement, the provisions appear to be heavily precedent based following those of the EU/Japan free trade agreement. However, it is noticeable that there is no regulatory cooperation annex (although there is a Joint Declaration, see below) and there are not even boiler plate provisions covering consultation and advance warning before an equivalence determination is withdrawn. On this basis, it is difficult to see how the agreement can be seen as any type of “Canada plus” free trade agreement. However, there are some positive points.  For example, during the negotiations, it was understood that the Commission was seeking to introduce provisions that would restrict the outsourcing of financial services but these have not found their way into the Agreement which is good news and helps keep the delegation model which a number of firms have adopted.  Financial services has also been excluded from cross-retaliation if there is a breach of another part of the Agreement although the significance of this is reduced on the basis that the Agreement does not provide market access but is still reassuring from a financial stability perspective.

Accompanying the Agreement is a Joint Declaration on financial services regulatory cooperation between the EU and the UK. The text of the Joint Declaration is as follows:

1. The Union and United Kingdom agree to establish structured regulatory cooperation on financial services, with the aim of establishing a durable and stable relationship between autonomous jurisdictions. Based on a shared commitment to preserve financial stability, market integrity, and the protection of investors and consumers, these arrangements will allow for:

• bilateral exchanges of views and analysis relating to regulatory initiatives and other issues of interest;
• transparency and appropriate dialogue in the process of adoption, suspension and withdrawal of equivalence decisions; and
• enhanced cooperation and coordination including in international bodies as appropriate.

2. Both Parties will, by March 2021, agree a Memorandum of Understanding establishing the framework for this cooperation. The Parties will discuss, inter alia, how to move forward on both sides with equivalence determinations between the Union and United Kingdom, without prejudice to the unilateral and autonomous decision-making process of each side.

Assuming the EU and UK approval process passes without a hitch, the UK will enter its new trading relationship with the EU on 1 January 2021 without knowing what positive equivalence assessments the Commission will grant. Temporary equivalence on clearing has been granted by the Commission but there are other areas, such as shares and derivatives trading and investment advice, that still need to be agreed on. The Declaration states that the parties will discuss how to move forward with equivalence determinations although it is worth noting that there is no timetable for granting decisions.

The UK has already granted equivalence to the EU across a number of financial services areas and being a former Member State its regulatory regime is one of the most, if not the most, equivalent regime to the EU. However, the stumbling block for positive EU equivalence determinations now appears to be how the UK’s regulatory regime will operate post January 1, 2021. In a Q&A document on the Agreement the Commission stated that a series of further clarifications were needed “in particular regarding how the UK will diverge from EU frameworks after December 31, how it will use its supervisory discretion regarding EU firms and how the UK’s temporary regimes will affect EU firms.”  The Commission added that equivalence rights would only be granted “when they are in the EU’s interest”.  An important additional point to note here is the extent to which individual member states have already and may continue to grant unilateral access on a bilateral basis. A number of member states permit such access. For example, Ireland continues to have what is effectively a MiFID professional business access right for third country firms which will now benefit UK firms and, in terms of specific new Brexit related access Luxembourg and Sweden have created a MiFID cross border regime for UK firms. Overall, what this leads to is a patch work of access rights across banking and investment business. An overlay on top of all of this is the extent to which firms may structure themselves to use reserve solicitation.

Therefore, there are a couple of key points to draw from the Agreement in relation to the financial services sector. First, it is clear that there is a lot more work for the two sides to do and it is not yet apparent whether there will be a more extensive equivalence regime now that the political temperature may lower as a result of the Agreement. One important point to consider is how the Commission’s approach will impact the UK Government’s future regulatory framework review, most recently seen with the publication of a call for evidence of the overseas framework. It may be that the two sides will either move towards a mutual equivalence approach at least in some areas or, alternatively, with the end of the UK transitional permission regime and possible changes to the overseas persons exclusion the two sides may both end up with less open regimes to the detriment of all. The second point to note is the importance of bilateral arrangements between the UK and individual member state regulators. The patchwork approach may yet prove to be the quicker and more useful mutual access approach but this remains to be seen.

What all of this means is that firms will need to keep a close eye on developments over the coming months. In many ways, we are at the start rather than the end of the negotiation process for financial services. In the short term, the position is as expected: firms will be continuing to plan on the basis of their “no equivalence” deal scenarios. What may have changed is the mood music and whether this will have broader implications will be key to watch.

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