The UK-EU trade deal: financial services

Financial services in the UK

Financial services is one of the UK’s biggest sectors, contributing 6.9% of total economic output in 2019. Our briefing paper Financial services: contribution to the UK economy outlines its contribution.

Brexit

In 2019, 40% of UK financial services exports went to the EU.

As part of the European single market, the UK enjoyed substantial market access in financial services to the rest of the EU through a system known as “passporting”.

Upon leaving the European single market on 31 December 2020, UK financial services lost passporting rights. Market access is now determined by a separate mechanism known as “equivalence”.

See our Insight post ‘Equivalence’ with the EU on financial services for a description of how equivalence works.

The UK-EU trade deal

What did the UK want?

The Political Declarations agreed with the EU by Mrs May in November 2018 and Mr Johnson in October 2019 contained the same three-paragraph wording on financial services. In summary, the UK and EU agreed:

• to commit to preserving financial stability, market integrity, investor protection and fair competition, while respecting regulatory autonomy;
• to endeavour to conclude equivalence assessments before the end of June 2020; and
• to close and structured regulatory cooperation, grounded in the economic partnership, recognising that this is in the mutual interests of both sides.

Equivalence

The agreed deadline in the Political Declaration for concluding equivalence assessments before the end of June 2020 was missed, with both sides blaming each other. On 9 November 2020 Chancellor Rishi Sunak announced the publication by the UK of its own equivalence assessments. But, with two temporary exceptions, so far the EU has refused to publish its own equivalence decisions. The EU’s financial services commissioner Mairead McGuinness has repeatedly said there is “no rush” to grant any more equivalence decisions to the UK.

The two temporary exceptions relate to (i) the use of UK clearing houses for derivatives transactions until the end of June 2022; and (ii) recognition of a UK Central Securities Depository (CSD) for settlement of (mainly) Irish securities until the end of June 2021. In preparation for the expiration of this equivalence decision, holdings for around €100 billion of Irish securities moved from London to Brussels in March 2021.

The deal (formally the Trade and Cooperation Agreement, or TCA)

The Financial Times notes that the TCA mentions financial services 90 times, but the word “fish” or variations of it appears 368 times. The references to financial services are largely precedents based on the trade agreement the EU negotiated with Japan. But unlike the EU-Japan Agreement, the TCA contains no obligation to consult before revoking equivalence decisions and no annex on regulatory cooperation (but there is a Joint Declaration, as discussed below).

Instead the TCA contains some general rules on trade in financial services, for example:

• neither the UK nor EU should limit the number of the other’s firms that can operate in its market or limit the number of people they can employ;
• the other’s firms should enjoy no less favourable treatment than other national or foreign suppliers;
• both the UK and EU agree to grant to the other’s financial service suppliers which are operating in their markets access to any payment systems operated by the State; and
• both parties agree to use their best endeavours to ensure that international financial services standards such as those from the G20, the Financial Stability Board and the Basel Committee on Banking Supervision, are implemented and applied.

As with the EU-Canada free trade agreement, the general rules contain a “prudential carve-out”. This means that nothing in the TCA prevents the UK or EU adopting rules for prudential reasons such as protecting investors or ensuring the integrity and stability of their financial systems.

Altogether, the rules on financial services in the TCA provide for greater access between the UK and EU in financial services than would have applied under a no-deal scenario. However, access still falls far short of what businesses had as part of the European single market.

Prime Minister Boris Johnson has said the deal does “not go as far as we would like” on financial services. According to the Financial Times “many City of London executives say it is effectively a “no deal” Brexit for them”.

Chancellor Rishi Sunak has cited provisions around data, business travel, legal and professional services, and “strong language” on future regulatory cooperation in support of his claim that there are “many things in the deal that are good for financial services”.

A 22 January 2021 Financial Times analysis stated that the TCA was “far from the finished article: Britain and the EU will carry on talking for months or years to fill in the gaps in the treaty, including on financial services and rules to allow professionals to work across borders.”

The Memorandum of Understanding

Accompanying the TCA were a number of Joint Declarations, including one on “Financial Services Regulatory Cooperation”. Under this Joint Declaration, the UK and EU agree to “establish structured regulatory cooperation on financial services” which will allow for:

• bilateral exchanges of views and analysis relating to regulatory initiatives and other issues of interest;
• transparency and appropriate dialogue in the process of adoption, suspension and withdrawal of equivalence decisions; and
• enhanced cooperation and coordination including in international bodies as appropriate.

The UK and EU committed to agreeing a Memorandum of Understanding (MoU) by the end of March 2021 to establish the framework for cooperation on the points above. This would include how to move forward with equivalence determinations.

Expectations for the MoU were mixed. Barney Reynolds, a partner at law firm Shearman & Sterling, said the memorandum “is likely to provide a lot of the comfort that the City is wishing for”, claiming that for some firms the MoU could provide “even greater access to sell in the EU than when Britain was part of the single market.” City A.M., however, reported on 6 January 2021 that “any agreement struck will only provide minimal access to EU markets at the absolute best and will more likely only set up a method for UK and EU regulators to swap information on decisions.”

The UK Government announced on 26 March 2021 that the MoU was agreed (with just “formal steps” remaining until signature), saying it will establish a “Joint UK-EU Financial Regulatory Forum” to serve as a platform for dialogue on financial services issues. It reportedly envisages twice-yearly meetings between the UK Chancellor and EU financial services commissioner.

The Financial Times called it a “successful piece of EU-UK co-operation” but noted that it “commits neither side to anything tangible” and described it as “minimalist”.

Impact

It will obviously take time to determine the full impact of the Brexit deal on the UK’s financial services sector. Nonetheless, there have been some early indications:

• The FT reported that on the first day of trading in 2021, €6 billion in EU share trading shifted from London to EU marketplaces such as Madrid, Frankfurt and Paris. While share trading is not the most lucrative business, the FT said the shift would mean lower tax receipts for the UK Government;
• The FT reported in February 2021 that Amsterdam had surpassed London as Europe’s largest share trading centre. EU-based financial institutions needed to move away from trading in London because the EU had not recognised UK exchanges and trading venues as being “equivalent”;
• According to think-tank New Financial, about 7,500 jobs have moved to the EU since the 2016 referendum, while banks and asset managers have transferred more than $1tn in assets, about a tenth of the total; and
• City A.M. reported in June 2021 that (according to data from EY) two in five financial services firms have moved or plan to move some UK operations and/or staff to Europe. However, many employees would reportedly rather quit their jobs than be relocated to cities in the EU.