Have we left yet?
At 11pm GMT, on 31 December 2020, the Brexit Transition Period ended and EU law ceased to apply in the United Kingdom. As a result:
- the EU passporting regime for financial services is no longer available to UK-based firms, and;
- the extent to which UK firms can continue to provide cross-border services to customers in the EEA depends on each EU member state's local law and local regulatory expectations.
Conversely, EEA-based firms must now either have a UK-based operation, or be able to rely on an exemption, an exclusion, or be acting in accordance with one of the UK's temporary regimes, in order to undertake regulated activity in the UK.
What does the Free Trade Agreement say in relation to Financial Services?
The eleventh hour Free Trade Agreement ("FTA") struck between the UK and the EU on 24 December 2020 includes little information and even less detail regarding Financial Services and unfortunately does not include any provisions for reciprocal market access for UK firms to access the EU through positive equivalence determinations. Therefore, Financial Services firms remain in much the same position as they were prior to the end of 2020.
What the FTA does tell us is as follows:
- The Financial Services provisions that are included in the FTA address access to Payment and Clearing Systems, and specific Prudential arrangements from 1 January 2021.
- Significantly, Financial Services is protected from a quid pro quo retaliation in the event of a dispute in other areas of the FTA; A dispute in respect of say, fishing rights, does not mean punitive measures can be invoked in respect of Financial Services under the FTA. It is worth noting however, that there is no mechanism to prevent the EU from revoking or amending any equivalence decisions unilaterally. Meaning that in the event of the UK introducing a laws or regulation that result in changes to defined standards on which equivalence is granted, UK firms could potentially lose access to the EEA overnight, if it is felt that, the UK had diverged too far from EU regulatory standards and that equivalence agreements are no longer valid.
- The FTA does not establish 'Most Favoured Nation' treatment for Financial Services, unlike it does for other aspects of the FTA; say in relation to 'Goods', hence, the lack of detailed provisions for Financial Services within the FTA. Unlike 'Goods' - for Financial Services, the UK has indicated a desire to operate differently and diverge from EU regulatory requirements; accordingly, the 'Most Favoured Nation' status is not feasible in respect of Financial Services.
- Additionally, it is of note that there is no regulatory cooperation Annex to the FTA (again, unlike a number of other aspect of the FTA that have cooperation Annexes), which leaves the terms of any future cooperation as yet unwritten and completely open to future negotiation.
- On a positive note, the EU proposed provisions that would have restricted the outsourcing of Financial Services between the UK and the EEA have not found their way into the FTA, which maintains the viability of the delegation model many firms have adopted, which is particularly fortuitous for Discretionary Fund Managers (DFMs).
- Further, the FTA does commit the UK and EU to common international financial crime prevention standards and requires them the use of 'best endeavours' in each territory.
In essence, in respect of Financial Services, the future nature of long-term engagement between the UK and EU is still to be agreed in both directions.
What does this mean and what are the next steps?
a. There are a further 3 months during which the detail of future cooperation on Financial Services will be discussed, with a framework for cooperation due to be published.
As a commitment to agreeing future engagement terms regarding Financial Services, the UK and EU have put forward a 'joint declaration' to establish a framework for 'regulatory cooperation', with the aim of "establishing a durable and stable relationship between autonomous jurisdictions".
This 'framework' is intended to facilitate dialogue between the two jurisdictions in regards to the adoption, suspension, or withdrawal of equivalence decisions between the UK and the European bloc ('the bloc'). The result of the joint declaration is a plan for the UK and EU to agree a Memorandum of Understanding (MoU) by the end of March 2021 to set out this more detailed 'framework' for future interaction and cooperation.
b. It is hoped that the UK will be granted equivalence in respect of Financial Services, which should help provide parity in terms of how each of the EU27 deal with the UK.
The FTA does not cover Equivalence of the UK. However, the two sides have committed to releasing a MoU within twelve weeks that will give further clarity on these equivalence rules.
Temporary equivalence on Clearing was granted under the FTA. Other key areas and activities that remain unclear include share dealing, derivatives trading, insurance, and investment advice, with individual equivalence decisions in each of these areas still to be agreed.
The joint declaration in the FTA simply states that the parties will discuss how to move forward with equivalence determinations in 2021. The UK however, has already granted equivalence to the EU across a number of areas of Financial Services (as evidenced through the TPR and FSCR).
c. It is unclear whether bilateral or multilateral access will be permitted by each of the EU27 and what that will mean for UK firms wishing to access each member state.
An additional area to monitor is the extent to which individual EU member states already, and continue to grant access on a bilateral or multilateral basis to the UK. A number of member states already permit such access and a key development will be the number of access routes each of the EU 27 are prepared to allow UK firms (and firms from other third countries) in terms of entering into financial and insurance services with each member state.
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. Luxembourg and Sweden have also created a MiFID cross-border regime accessible to UK firms. Accordingly, we know that the direction of travel for these three locations will be bilateral access, firstly through the MiFID regime, but also through likely access agreed under the MoU and framework that sets out future Financial Services cooperation with the EU. The potential risk is that what will emerging is a patchwork of access routes, offering varying degrees of access for UK firms, which is then further differentiated depending on whether, for example, firms wish to provide banking services or investment business to the EU. We remain optimistic that insurance practises will still have the IDD at their foundation, to give some consistency in dealing with jurisdictions across the EU. There is, however, a real danger that once further alternative market access routes are overlaid, such as exemptions, exclusions and reverse solicitation, the outcome of the future cooperation terms could be both overly convoluted and very complicated. This result could be in an environment that is inhospitable for Financial Services, making it prohibitive for UK firms to try to deal consistently with 'the bloc' as a whole, or to actually be able to offer services to multiple EU jurisdictions in either a compliant, or commercially viable manner.
The verdict?
At this stage, the FTA has not provided firms with any further clarity regarding the future basis for Financial Services interactions between the UK and the EU. Whilst this is not unexpected, it is nevertheless disappointing that there are still no certainties in terms of regulation, or the delivery of financial and insurance services following the end of the Transitional Period. There is still cause for optimism; however, we are at the start of the negotiating process for Financial Services, rather than nearing the end. In the immediate term, firms should continue to plan on the basis of a 'no deal' scenario, keeping a watching brief on developments in the negotiations. Although the words are no longer being used, the detail of the terms agreed for Financial Services could still end up being materially the same as a 'No-deal' outcome. The next 3 months are pivotal, but in many ways, it feels like 'back to the future', as the outlook for Financial Services remains no clearer than it has been since the 2016 referendum.
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