The Trade and Cooperation Agreement signed on 30 December between the EU, the UK and the European Atomic Energy Community creates a new economic and social partnership between the EU and the UK following the end of the transition period on 31 December 2020.
The Agreement largely addresses the mechanism for trade in goods, with zero tariffs and zero quotas on all goods that comply with the relevant rules of origin. It also addresses fisheries, data protection, social security coordination, competition and State aid among other things. The Agreement does not allow banks, insurers or other financial services firms authorised in the UK automatic access to EU markets. The financial sector therefore is reliant on equivalence decisions and future government regulations going forward to determine access rights.
Financial Services Passports and Equivalence Decisions
Following the end of the transition period, it is no longer possible for financial services firms authorised in the UK to take advantage of the passporting regime, by which their UK authorisation could be used as a basis to offer equivalent financial services in the EU. So a UK financial services firm wishing to offer financial services to clients in the EU will need to be appropriately authorised in accordance with the laws and regulations of that jurisdiction, or benefit from an equivalence decision by the EU Commission to the effect that the corresponding UK and EU regulations are equivalent, so that a separate EU authorisation is not required. This is also the case for EU firms wishing to provide financial services to UK clients.
The Trade and Cooperation Agreement does not cover equivalence decisions for the financial services sector in respect of the regulatory regimes of member states of the EEA. Equivalence decisions are made unilaterally by the EU and the UK and are not subject to negotiation. The determinations can also be removed with immediate effect and so in the future will likely be affected by how much UK financial regulations diverge from EU financial regulations. There are up to 40 financial services areas where the EU is considering equivalence decisions but it is biding its time in case the UK government begins implementation of a new and diverging financial services regime.
So far, the European Commission has only granted temporary equivalence in very limited cases to UK market infrastructure providers where necessary to address financial stability concerns. The temporary nature is consistent with the EU’s desire to move Euro clearing and trading to within the EU.
In contrast, the UK has unilaterally granted equivalence to EEA entities in 22 financial services areas and is applying a temporary permissions regime in other areas while those firms seek appropriate UK authorisations.
The Prudential Carve-out and International Standards
Section 5 of the Trade and Cooperation Agreement contains a “prudential carve-out”. Either party may adopt or maintain measures for prudential reasons to either protect investors, depositors, policy-holders or persons to whom a fiduciary duty is owed by a financial service supplier or to ensure the stability of a party’s financial system. Such an article creates scope for divergence in policy that directly impacts financial services.
A parallel declaration to the Trade and Cooperation Agreement commits both sides to establish a memorandum of understanding in respect of dialogue on financial services and equivalence-related processes by March 2021.
There are hopes that the Memorandum of Understanding will incorporate a mechanism to maintain equivalence and reduce the possibility of unilateral withdrawals of equivalence decisions, but nothing is yet agreed. Most financial services businesses will have already anticipated th loss of passporting and either set up EU-based businesses or refocused on the UK domestic market, but there may still be business that suffer a loss of business under the new regime.
Time will tell where we are going. The UK will be keen to use its new found freedoms to maximise its strong global position in pre-eminence in financial services, but this may mean lack of equivalence so that EU markets are closed off to UK based entities. It is too early for us to know whether the UK will “prosper mightily”, as our prime minister predicts, or whether the UK will suffer in the face of increasingly stiff competition from rival financial services centres both within the EU and globally, with its access to the EU market diminished.