Brexit: What does the deal mean for the financial sector?

What is regulated in the free trade agreement for financial services?

As expected - and broadly in line with previous FTAs - the provisions relating to services, especially financial services, are quite limited. They again reflect those aspects where rough similarities were evident between the EU and UK drafts published earlier in 2020 - but fall short in some areas of the more ambitious targets that the UK was aiming for.

Among the few financial services provisions included in the agreement, are the reciprocal access to payment and clearing systems operated by public entities and the access to official financing and refinancing facilities available for normal business operations (Article SERVIN.5.44).

It is also stipulated, that the contracting parties must allow the provision of new financial services in their territory if they would also allow their own companies to do so under the applicable laws (Article SERVIN.5.42). However, this fundamental prohibition of less favourable treatment expressly does not apply to branches of legal entities of the respective contracting party.

The Parties must also use their best efforts to implement and apply internationally agreed standards for the regulation and supervision of financial services; these include, for example, the standards of the Basel Committee on Banking Supervision (Article SERVIN.5.41). This agreement is not surprising because the United Kingdom can count itself among the founding members of the Basel Committee and its legal predecessors and thus observed and - to a large extent - helped to shape all relevant international standards well before its accession to the European Economic Community in 1973 and before most member states.

There is an important prudential carve-out in the FTA, which states that the FTA may not prevent either party from continuing to take prudential measures that serve, for example, financial stability or investor protection - even if those measures are inconsistent with other provisions agreed to in the FTA (Article SERVIN.5.39). This provision is similar to the provision in the relevant financial supervision directives, which allows member states to adopt national rules that are in the national general interest.

The free trade agreement provides for a most-favoured-nation clause, obliging the contracting parties not to treat the other party less favourably than other third countries. However, approvals for services, i.e. also for financial services, are excluded from this obligation. (Article SERVIN.2.4 (3)).

What uncertainties remain for financial services despite the Brexit deal?

The free trade agreement thus says - and nothing else could be expected with the best will in the world - hardly anything about cross-border services in the financial services sector. Future market access arrangements in this sector will instead be based on equivalence decisions made unilaterally by the UK and the EU and are not part of the FTA. Although the goal of completing the equivalence assessment during the transition period by the end of June 2020 was originally agreed upon as part of a joint statement, this is still largely outstanding.

Although an equivalence decision was made in 2020 for the area of CCP clearing of derivatives, it was only temporary and for a period of 18 months. Therefore, the equivalence decision will remain in force until June 30, 2022 and according to the EU Commission, the transitional arrangement is in particular also intended to give EU financial market participants time to reduce their dependence on CCPs in the United Kingdom. An extension or permanent recognition of equivalence in this area has not yet been indicated. The ECB has also pointed out the discontinuation of temporary equivalence for clearing houses in the course of the banks' Brexit preparations. The requirements for "EU Products" mentioned in this statement will certainly be further specified in the near future.

Currently, the EU Commission has not announced any further equivalence decisions. Moreover, equivalence decisions already taken can be unilaterally revoked or changed again by either party at any time. Uncertainty for the financial sector therefore remains high despite the Brexit deal. This applies in particular to trading in financial instruments.

However, the parties agreed in a joint statement to develop a framework for cooperation on supervisory issues. This is intended to enable transparency and a joint dialogue in the process around the issuance, suspension or withdrawal of equivalence decisions, as well as a constant exchange in relation to supervisory initiatives. The UK and the EU aim to adopt a memorandum by March 2021 to set out the framework for this cooperation.

While the joint statement on supervisory cooperation is intended to lay the foundation for a more stable equivalence process, defining the framework will require further negotiations. The outcome is uncertain at this time. However, a common framework will be important to create a reliable environment for trade between the UK and the EU in financial services and to ensure a close ongoing dialogue in financial sector regulation. It remains to be seen whether at least the discussion framework - as agreed - will be in place by March 2021.

What are the consequences of the Brexit deal for financial services?

Companies in the financial sector have now had more than four years to prepare to ensure their access to the post-Brexit UK and EU markets. These companies now need to assess the wider implications of the agreement on other areas as well, such as the mobility of their workforce. Although financial services remained largely unregulated in the FTA, the mere fact that an FTA has been concluded is positive for the business environment and customers of the financial sector. Anything else would also have hit the financial sector hard and, among other things, would have had a negative impact on the creditworthiness of business customers with a strong connection to the UK. This would have happened at a time when most companies are under pressure anyway due to the COVID-19 pandemic. Nevertheless, the financial sector has a strong interest in quick and safe equivalence decisions.

The foundations laid down by the FTA help to create a framework for areas that could not be regulated, i.e. with regard to equivalence assessment, data protection or cooperation in supervisory issues, for example. The use of this framework can contribute to a strengthening of future cross-border service provision in the financial sector and ensure benefits for consumers and companies.

We are looking forward to exchanging ideas with you on how the Brexit deal will affect your business and how we can support you in your specific preparations in view of the latest developments.