Introduction to EU-UK Trade Agreement & Financial Services
On 24 December 2020, the EU and UK agreed on a new framework governing EU and UK relations after the end of the Transition Period (31 December 2020). The package of measures include a Trade and Cooperation Agreement (the Agreement), together with a Political Declaration covering a number of areas (including financial services). The Agreement is set to provisionally apply from 1 January 2021 onwards.
Broadly, the Agreement does not include substantive provisions across financial services. In particular, it does not allow UK investment firms to provide services into the EU. UK firms will therefore continue to have to rely upon individual member state exemptions, or where relevant, reverse solicitation.
Does the Agreement allow a UK investment firm/bank/investment manager to carry out business in the EU?
Answer: no.
The Agreement does not provide any form of licensing relief to UK investment firms (e.g. brokers/banks/portfolio managers) or deposit takers – so, no equivalence framework or no mutual recognition. For example, UK brokers, banks, portfolio managers will have to continue to look the individual member state exemptions in order to do business in Europe, or rely upon where relevant reverse solicitation.
There is also no transitional or grandfathering for financial services firms set out in the Agreement.
Consequences: UK firms, as at 1 January 2021, will lose the ability to passport their services into the EU. For an illustration of member state level reliefs that UK firms may be able to rely upon (depending on the type of business they carry out). An updated version of our Brexit heat map will be up on our website in the next couple of days.
Is there anything of use to UK financial services firms?
Answer: for UK financial services (save for some insurers) the Agreement only has indirect benefits i.e. rights that arise from general areas such as terms agreed on employment (i.e. ability to travel subject to workplace visas) and an agreement that data transfers from the UK to the EU is not treated as a transfer of data outside of the EU (for GDPR purposes) for four months - hopefully giving time for the EU to agree a data adequacy assessment.
What about equivalence? Surely, the UK should receive equivalence?
Answer: there is an agreement in the political declaration accompanying the Agreement for both the EU and UK to work towards "regulatory cooperation on financial services by March 2021". There is no binding commitment by the EU to issue an equivalence decision, and this remains likely to be a political decision based on UK-EU relations. The European Commission has stated that it is awaiting further clarification from the UK on its policy plans, and will consider equivalence when it is in the EU's interest….
It is worth noting that equivalence decisions generally can be withdrawn by the EU at short notice; this has led some commentators to question whether equivalence decisions are a stable basis for the UK financial services industry (the case of Switzerland is often noted).
Anything else?
Answer: there are some general areas typically covered in EU free trade agreements, including:
- Best endeavours agreement to implement and apply internationally agreed standards in the financial services sector e.g. the Basel Committee on Banking Supervision “Core Principle for Effective Banking Supervision” and the Financial Action Task Force.
- Requirement for UK and EU self-regulatory organisations (i.e. non-governmental body such as securities or futures exchange or market, clearing agency) to admit financial services suppliers from the UK and EU on a non-discriminatory and “most favoured nation” basis.
- Provisions allowing mutual access to payment and clearing systems operated by public entities, and to official funding and refinancing facilities available in the normal course of ordinary business.
