Following the end of the Brexit Transition Period, we assess the impact of the EU-UK Trade and Cooperation Agreement on the UK financial services sector and set out our analysis of the key points below. We also look ahead to the forthcoming EU-UK Memorandum of Understanding and its potential impact on equivalence decisions.
On 26 December 2020, the text of the Trade and Cooperation Agreement between the European Union and the United Kingdom (the “TCA”) was published (link). On 31 December 2020 at 23:00 UK time, the Brexit Transition Period ended and the TCA started to apply on a provisional basis.
A separate, short Joint Declaration on Financial Services Regulatory Cooperation (the “Joint Declaration”, link) was published alongside the TCA. The Joint Declaration is essentially an agreement to agree at a later stage some of the detail on financial services which, as has been widely commented on, is absent from the TCA. In this respect, the UK and the EU intend to agree a Memorandum of Understanding (“MoU”) by March 2021. An MoU will not have the same legal effect and status as an international treaty and may not necessarily be published in full.
Analysis of key points
Firstly, as many had been expecting, the end of the Brexit Transition Period has resulted in significant changes to EU-UK trade in financial services because the TCA does not include any provisions that make up for the loss of passporting rights under the Single Market Directives. In particular:
There is no mutual recognition of licensing regimes. This means that UK firms will no longer be able to rely on their UK licences to provide services to customers across the EU to the extent that a licence is required (which may not always be the case, for example in cases of reverse solicitation). Instead, UK firms will now be subject to a patchwork of rules in each of the individual EU Member States where they want to do business. Practically, depending on their business models, there will still be a need for many UK financial services groups to set up new entities in the EU, to apply for new licences and/or to stop servicing certain clients in the EU (to the extent that they have not already done so). Many firms have already obtained, or are in the process of obtaining, legal advice in the EU Member States where they have existing customers, or where they intend to target customers in the future, in order to understand the different regimes and the temporary measures that have been put in place in some cases.
The market access provisions do not preclude EU Member States from imposing authorisation requirements on UK financial services businesses. The TCA includes several well-established provisions on market access, which have appeared in substantively the same form in other free trade agreements (“FTAs”) that the EU has entered into. Fundamentally, UK investors and financial services businesses will broadly retain the right to establish enterprises in the EU, but this is subject always to the prudential carve-out, which preserves the ability for the parties to adopt or maintain measures for prudential reasons, and extensive reservations in relation to existing and future non-conforming measures that do not comply with certain principles of the TCA. In practice, this means that EU Member States can require third country providers of certain financial services to be established in and/or authorised in their jurisdictions and can use this as grounds for justifying other restrictive regulatory/licensing conditions.
Secondly, there are no provisions in the TCA on equivalence or regulatory cooperation in the area of financial services. This is significant because if the EU adopts equivalence decisions in relation to the UK in certain key areas it will have a huge impact on the ability of some EU firms to continue to trade and do business in the UK and vice versa. For example, if the Commission adopts equivalence decisions in relation to UK trading venues, then EU firms will be able to trade shares subject to the EU share trading obligation on UK venues without breaching their regulatory obligations, which is not currently the case in all circumstances. In addition, both the EU Markets in Financial Instruments Regulation and the Alternative Investment Fund Managers Directive contain regimes providing respectively for the cross-border provision of investment services to eligible counterparties and per se professional clients and the marketing of funds by third country firms. However, these regimes rely on equivalence decisions and regulatory cooperation and are yet to be “switched on”.
Under the Political Declaration agreed in October 2019, the EU and UK had stated that they would endeavour to conclude equivalence assessments “before the end of June 2020” (para 36, link). However, so far the EU has only adopted a small number of equivalence decisions, including time-limited equivalence decisions in relation to UK central securities depositories until 30 June 2021 and UK central counterparties for the purposes of derivatives clearing until 30 June 2022. In this respect, the recent Joint Declaration states that the UK and EU will “discuss how to move forward on both sides with equivalence determinations”, but it also states that this will be “without prejudice to the unilateral and autonomous decision-making process of each side”.
As such, it appears that there has not yet been any progress on ensuring that EU equivalence decisions cannot be withdrawn unilaterally at short notice or at least without prior consultation (as is envisaged by the EU-Japan FTA), although it remains to be seen what language will be included in the MoU. It does seem unlikely that there will be any specific commitments in relation to equivalence in key areas but any announcements around the negotiation and the publication of the MoU itself may give a better indication as to whether the EU intends to take equivalence decisions in relation to the UK in key areas and (if so) what the likely timetable might be.
Finally, the EU has largely carved out financial services from the most-favoured nation provisions for investment liberalisation and cross-border trade in services, which means that in theory the EU is free to offer better terms on financial services to other jurisdictions in the future without offering the same to the UK.