Hard Brexit for financial services

Since 1 January 2021 economic relations between the EU and the UK are governed by the Trade and Cooperation Agreement ("TCA") agreed on 24 December 2020 between the EU and the UK as a third country (see link here). The UK voted to leave the EU in June 2016 and officially left the EU on 31 January 2020. But both sides had agreed to keep much of their economic relationship unchanged until the end of 2020. That transition period provided for in the Brexit Withdrawal Agreement has now come to an end. Henceforth, the EU and the UK form two distinct regulatory and legal spaces and the UK’s relationship with the EU is based on international law.

The TCA is an important and welcome achievement. It creates a basis for a constructive partnership.

The TCA’s primary focus is on trade in goods. Bilateral trade will not be subject to tariffs or quotas (although there are customs declarations and inspections). The TCA also provides for broad economic, social and environmental cooperation in areas of mutual interest and a framework for citizens' security.

However, there is almost nothing in the TCA on financial services.

• A new world for UK-EU cross-border financial services

There is no transition period for financial services and the TCA does not deal with regulatory equivalence. Hence, since 1 January 2021 UK financial service providers can no longer rely on passporting rights to access the EU market and vice versa. This implies a de facto "hard Brexit" for financial services. The UK will be treated like any other third country by the EU. In addition, subject to limited exceptions below, no unilateral equivalence decisions have been decided yet by the EU with regard to the UK.

However, the following specific elements of the TCA are worth noting:

• The UK and EU preserve their respective rights to put in place measures for prudential reasons, such as the protection of investors, depositors or insurance policy-holders or to ensure the integrity and stability of their respective financial system.
• There are some specific non-discrimination provisions, such as the commitment to permit service suppliers of one party established in the other party's territory to supply new financial services if permitted for its own financial service suppliers. To the extent national authorisation is required, such authorisation must be provided within a reasonable time. Further, the TCA also requires UK and EU self-regulatory organisations (i.e. non-governmental bodies such as securities or futures exchange or market or a clearing agency) to admit financial services suppliers from the UK and EU on a non-discriminatory and “most favoured nation” basis. The principle of non-discrimination is introduced also regarding access to clearing and payment systems.
• In addition, the TCA includes a "best endeavours" commitment by both parties to ensure that internationally agreed standards in the financial services sector for regulation and supervision, with respect to anti-money laundering, combatting terrorist financing, financial crime as well as tax evasion and avoidance are implemented in their jurisdiction. This implies continued maintenance of standards both sides have previously agreed to, such as standards adopted by e.g. the G-20, the Financial Stability Board, the Basel Committee on Banking Supervision, or the Financial Action Task Force.
• Finally, although there is no more free movement of people, there are facilitating rules for short-term business trips and temporary secondments of highly-skilled employees which also apply to financial services. Nothing is provided, however, on the recognition of qualifications.

In parallel to the TCA, the EU and the UK adopted a Joint Declaration on Financial Services Regulatory Cooperation, including transparency and dialogue on equivalence decisions. This is a political declaration without any direct benefits for the financial industry. It provides that the EU and the UK will, by March 2021, agree a Memorandum of Understanding (MOU) establishing the framework for cooperation on equivalence decisions whilst recognising each side's unilateral and autonomous decision-making process in this regard. So far, the EU has only adopted a very small number of equivalence decisions, including time-limited equivalence decisions in relation to UK central securities depositories until 30 June 2021 and UK central counterparties for the purposes of derivatives clearing until 30 June 2022.

EU regulatory authorities and national regulators have stepped in to facilitate the provision of cross-border financial services in certain areas. For instance, at Luxembourg level, through CSSF Regulation 20-09 on the equivalence of the UK for the purpose of the MiFIR regime, cross-border services by UK investment firms to Luxembourg to eligible counterparties and professional clients are facilitated (see our previous Newsflash on this topic).

• What's next?

The TCA applies provisionally until 28 February 2021 at the latest, giving the European Parliament time to examine the final text before giving its consent. According to the EU, consent by Member State parliaments is not required on the EU side. The UK Parliament has already approved the TCA.

Regarding financial services, Member States' national market access and exemption regimes will set the tone as long as no equivalence decisions are adopted at EU level. There is no timeline for when the EU's equivalence assessments will be completed. In any event, equivalence is meaningful only for those areas of financial services for which relevant EU directives and regulations provide for the possibility of (limited) passporting rights or other accommodations to ease cross-border activity based on such decisions. This is notably the case for MiFID services.