What does the Brexit deal mean for UK financial services?

Is financial services provided for in the agreement?

The UK-EU Trade and Cooperation Agreement signed between the EU and the UK government has been referred to by some commentators as a “thin deal” because it does not address every aspect of trade between the EU and the UK. As my colleague Claus Andersen reported (read here) however , the deal does provide for tariff-free and quota-free access for UK goods into the EU market and a framework for the basis on which future agreements can be reached.

One area widely reported as not being provided for in the agreement is the relationship between the UK financial services industry and the EU, with Boris Johnson admitting that the deal failed to meet his ambitions on financial services. For a sector which accounts for 7% of the UK’s economy, and 10% of its tax receipts, the current talks between Treasury Minister John Glen and the EU this week are crucial in providing some certainty as to the ability of UK financial services institutions to provide services in the EU. It is hoped that a memorandum of understanding which will guide future regulatory cooperation on financial services will be agreed by March. Insiders are reporting however that the talks on the City of London’s future relationship with the EU is likely to result in a bare bones agreement, with limited access to EU markets.

What rights do UK financial services institutions need to provide services in the EU?

In order to provide services for customers in the EU, UK based institutions will need to have been granted equivalency rights, whereby the EU permits them to conduct activities in the EU market. Regulatory equivalence is where the EU’s regulators acknowledge that a non-EU country’s financial regulations (as to the legal, regulatory and supervisory regimes) are as good as its own, or “equivalent”. Unlike a model based on mutual recognition, the EU would decide on a case by case basis whether UK regulations achieve the same regulatory objectives as EU regulations, even if they do not precisely mirror them. Provided the non-EU country’s, in this case the UK’s, regulations are deemed “equivalent”, it would then be permitted access to the financial services sector within the bloc. For example, the EU has granted temporary equivalence to clearinghouses in the UK, until 22 June. With the majority of European clearing activity taking place on London-based exchanges, this provides time for EU-based institutions to decrease their reliance on British-based clearers. Whilst the UK has granted unilateral equivalence rights across several financial services areas for firms from EU states, EU equivalence assessments are likely to continue well into 2021, with businesses will be relying on regulations from individual member states in the meantime to permit them to provide services within the EU.

What's the likely outcome of the negotiations?

With UK based financial institutions having lost automatic access to the EU’s single market on 1 January, and £1.2 trillion of assets having been relocated to the EU from the UK since 2016 and more than 7,500 jobs in the industry have left the country, it is clear that a long term agreement which provides for regulatory and supervisory co-operation and a stable equivalence recognition is required for the UK financial services industry. Achievement of a deal on this basis will however likely require the UK to commit to stay in the regulatory orbit of the EU financial services regime, how politically appetising this is for the government remains to be seen.