Mutual recognition in FS: UK and Switzerland agree terms

May 2024  |  FEATURE | BANKING & FINANCE

Financier Worldwide Magazine

May 2024 Issue

The importance of the financial services (FS) sector to the UK economy – a sector that employs 2.3 million people and makes up 10 percent of total UK tax receipts – cannot be understated.

Underlining this importance is a 2022 report by the House of Lords European Affairs Committee which states that, despite challenges presented by Brexit, the UK’s exit from the European Union (EU) has proven to be less significant than predicted, and its FS sector has remained strong.

However, as well as praising the sector’s strength, the committee also warned the UK government against complacency, stating that ministers must ensure their future approach delivered for the FS sector and the wider UK economy. Recent negotiations with fellow European financial powerhouse Switzerland have gone some way toward meeting this request.

“Switzerland and the UK are among the largest exporters of FS in the world,” concurs Reto Luthiger, a partner at Meyerlustenberger Lachenal Froriep. “Bilateral relations in the financial sector have always been close, and the UK’s withdrawal from the EU provides both sides with the opportunity to significantly deepen these relations.”

Unlike the UK, Switzerland has never been a member of the EU. Its association with the bloc consists of a series of bilateral treaties in which it has adopted various provisions of EU law in order to participate in the single market. But, similar to the UK, its financial sector is one of the most important industries of the Swiss economy.

“Following the UK’s withdrawal from the EU, the Swiss Federal Council adopted the ‘Mind the Gap’ strategy to safeguard mutual rights and obligations between Switzerland and the UK,” says Mr Luthiger. “In 2019, an agreement on direct insurance was signed and then, in December 2023, the two major international financial centres were signatories to an agreement promoting close cooperation: the Berne Financial Services Agreement.”

The Berne Financial Services Agreement

Following more than two years of negotiations, the Berne Financial Services Agreement was signed by Karin Keller-Sutter, head of the Swiss Federal Department of Finance, and Jeremy Hunt, the UK’s chancellor of the exchequer, and hailed as unique in terms of its approach and scope.

At the heart of the agreement is a new and innovative model of mutual regulatory recognition, which provides stability for UK businesses supplying FS to clients in Switzerland (and vice versa), as well as supporting unprecedented new market access. The agreement will also reduce regulatory barriers, making doing business between the two countries easier than ever.

More specifically, the agreement focuses on three key business activities and market participants, as outlined by the Swiss Federal Council.

First is banking services. For banking services, in particular wealth management, the agreement enables Swiss FS providers to supply certain cross-border activities into the UK and confirms the current framework for UK firms to supply such activities into Switzerland.

Second is asset management. In this area, the agreement confirms existing access for the advertising and offering of collective investment schemes, as well as the delegation of portfolio management and risk management.

Third is insurance services. The agreement covers selected lines of non-life insurance business, where UK insurance companies will be allowed to engage in cross-border activities, while the UK is confirming its current framework enabling Swiss firms to provide cross-border insurance services.

“The agreement provides opportunities for businesses in both countries to expand their operations and reach new markets,” adds Mr Luthiger. “Ongoing explorations for further negotiations regarding benchmarks, credit rating agencies, trade repositories and over-the-counter derivatives trading duties also sound promising.”

Promising but not without problems. “The main challenges both jurisdictions face in implementing the mutual recognition set forth in the agreement are ensuring that their respective FS regulatory and supervisory regimes are compatible, and that they can effectively cooperate and coordinate their efforts,” continues Mr Luthiger. “This will be especially challenging where both countries have followed different regulatory approaches, such as with cryptocurrency regulations.”

Awaiting approval

Before it can enter into force, the Berne Financial Services Agreement requires approval by the parliaments of both countries. In Switzerland, the Federal Council is expected to submit the agreement to the Swiss parliament in the first half of 2024, while the UK government will likewise seek ratification in line with UK parliamentary processes.

“The new agreement is expected to have a positive impact on the trade relationship between the two countries,” concludes Mr Luthiger. “Facilitating cross-border trade in FS on the basis of mutual recognition of standards and application of domestic law, the international competitiveness of both financial centres will likely be enhanced.”

What can be said for certain is that the agreement creates a solid framework between the UK and Switzerland, building on both countries’ shared belief in open and resilient financial markets and cementing the relationship between two of the world’s leading financial centres.

© Financier Worldwide

BY

Fraser Tennant