UK/EU free trade agreement: impact on financial services firms

July 2021  |  FEATURE  |  FINANCE & INVESTMENT

Financier Worldwide Magazine

July 2021 Issue

Financial services has been an area of intense debate in the UK, given the country’s economic reliance on the industry and the importance of its relationship with the EU. Prior to Brexit, around 40 percent of UK financial services trade came from the EU, but this figure is likely to decline following the split.

The 2016 Brexit vote precipitated an exodus of financial services firms from the City of London. According to New Financial, more than 440 firms in banking and financial services have relocated part of their business, moved employees or set up new entities in the EU following Brexit. Some 7400 jobs have moved from the UK or been created at financial hubs in the EU. Dublin has won the most financial services business since 2016, with 135 firms relocating some work there. Paris saw 102 relocations, followed by Luxembourg with 95, Frankfurt with 63 and Amsterdam with 48.

While the UK will be motivated to forge stronger business ties with Asia and the US in the coming years, a healthy connection with the EU remains vital to the economy. Due to the impact of the COVID-19 pandemic, the UK cannot afford further economic damage.

A new framework

After years of disagreement and uncertainty, last December the UK government announced it had reached a trade agreement with the EU: the UK-EU Trade and Cooperation Agreement.

Though the Agreement clarified the framework for UK-EU trade, it is not a comprehensive free trade agreement. As such, from 1 January 2021, UK financial services firms intending to do business in the EU have not been able to rely on the EU Single Market to offer their services using the EU passporting system. Market access for financial services firms contained within the Agreement is similar to other EU foreign trade agreements with third countries, in that they must comply with EU legal obligations tied to market access, including authorisation requirements and supervision.

Lack of passporting is one of the biggest losses. Under the Agreement, neither EU or UK financial services providers have the right to set up establishments or provide cross-border services in the other party’s territory on the basis of an authorisation obtained under domestic law. However, UK and EU firms will be able to set up establishments and provide services into the territory of the other party, subject to compliance with local authorisation and licensing requirements.

The absence of ‘equivalence’, which would allow both sides to maintain previous market access, is significant. Equivalency frameworks for the financial services industry have not been included in the Agreement. A deadline to conclude ‘equivalence’ assessments before the end of June 2020 was missed, meaning the status was not granted as part of the Agreement. To date, the EU has only granted temporary equivalence in two areas – for derivatives clearing houses and to settle Irish securities transactions.

Provisions

The Agreement does contain a number of provisions relevant to the financial services sector. Most notably, Title II of Part Two contains several general provisions governing investment and services, including financial services, as well as a section specifically dedicated to financial services.

The provisions focused on financial services include: (i) a significant prudential carve-out which states that nothing in the Agreement prevents a party from adopting or maintaining measures for prudential reasons; (ii) a provision to protect the confidentiality of the affairs and accounts of individual consumers and any confidential or proprietary information in the possession of public entities; (iii) a commitment by the parties to use their best endeavours to ensure that they implement and apply internationally agreed standards in the financial services sector for regulation and supervision, anti-money laundering and counter terrorist financing and for combatting tax evasion and avoidance; and (iv) a requirement for each party to ensure that, where the party requires membership of, participation in or access to a self-regulatory organisation to supply financial services in its territory, that organisation complies with requirements regarding national treatment and most-favoured nation treatment.

Cooperation

In March 2021, the UK and the EU took a step forward and reached a cooperation agreement on financial services. The memorandum of understanding (MoU) will “create the framework for voluntary regulatory cooperation” and establish a regulatory forum which will “serve as a platform to facilitate dialogue on financial services issues”, according to the UK government.

The MoU also establishes the Joint UK-EU Financial Regulatory Forum, which will provide a platform to facilitate dialogue on financial services issues. The content of the MoU has yet to be made public so it remains to be seen how far it goes in terms of close regulatory cooperation and information sharing between the two sides.

However, compared to provisions typically included in free trade agreements, the MoU does fall short in certain areas – most notably regarding EU market access for UK firms. While the UK, of course, can no longer benefit from access on par with its prior EU membership, it now has a lower level of access than certain other third countries, such as Japan, for example.

Friction

As with most areas arising from Brexit, friction remains. But looking ahead, it is likely that the UK will continue to play an important role in European and global financial services, despite the specific inadequacies of the UK-EU Trade and Cooperation Agreement.

© Financier Worldwide

BY

Richard Summerfield