On Tuesday night the proverbial white smoke rose over Westminster and slipped through the digital news outlets of our phones and tablets. The UK government after many, sometimes difficult discussions during a several hours meeting gave its green light to the agreed text of the withdrawal agreement hammered out by the respective EU and UK negotiators. The outline of a political declaration on the future relationship between the European Union and its future once member had also been agreed.
The financial sector has been following these negotiations with a very keen interest over the last two years but in the end what do the withdrawal agreement and political declaration mean for the financial industry?
For one the withdrawal agreement provides for a transition period from day one of Brexit, 29 March 2019 to the 31 December 2020. For the operational functioning of financial services this buys time to prepare as the UK stays in the Internal Market and in practice things stay the same for a little while longer with a.o. the EU passport still available for the City of London and vice-versa. Also, citizens’ rights are provided for in the withdrawal agreement, which gives some reassurances to staff impacted by Brexit.
The political declaration looks to the future. It outlines what the big lines of a future relationship agreement will look like. The latter is supposed to be negotiated during the transition period. On financial services the outline of the declaration refers to the EU’s and UK’s “regulatory and decision-making autonomy”. This means in practice a.o. that access to each other’s markets remains a matter of national sovereignty and will not be dealt with in the agreement.
In limited areas financial relations with the City of London can be facilitated by so-called “equivalence decisions”. These are independent decisions by the EU respectively by the UK based on assessments concluding to the “equivalence” of each other’s legislative and supervisory framework in very specific areas. In order to provide for a framework at the end of the transition period, both the European Union and the United Kingdom commit to “endeavouring to conclude these assessments before the end of June 2020” i.e. half a year before the transition period is to expire.
Thirdly, the outline of a political declaration provides for a commitment to engage in a close and structured cooperation on regulatory and supervisory matters. This is important as it will increase the chances of actual equivalence being established and such decisions granted in the future.
Given the limited expectations that one could have had for the future deal taken into consideration all the declared red lines of the respective parties, the withdrawal agreement as well as the outline for a political declaration are somewhat reassuring. Nobody could in these circumstances realistically have expected much more.
Nevertheless behind the above mentioned white smoke a dark cloud of uncertainty still hangs in the sky. As other international treaties have shown in the past, an agreement, even officially signed, is barely worth the paper it is written upon if it has not been ratified by all the parties.
On the EU side the ratification is not expected to encounter too many obstacles. On the other side of Channel, the string of resignations from the government and attacks from her inside her own party we have witnessed in the past 48 hours show how controversial the agreement has proven to be and Prime Minister Theresa May is maybe facing her toughest test: keeping her job in the immediate future and later on getting the agreement through Westminster having to count on the opposition to make good for the expected defections in her own Conservative Party. If she fails on only one of the two, the deal is gone and history. Brexit followers and the industry are still holding their breaths.
By Antoine Kremer, ABBL & ALFI Head of European Affairs