Looking beyond Brexit: what now for financial services?

ABBL Published 24.01.2020

As the 31st of January is approaching, it is time to wrap up where we left with Brexit, see what will happen after the estimated due date and what will be the impact for financial services.

As the loyal reader of this column might recall, PM Johnson decided to call elections before Christmas to get a stronger majority of Conservative seats that would be able to push the ratification process of the Withdrawal Agreement through the House of Commons. He won his bargain supremely and on 19th December the UK Parliament voted 358 to 234 in favor of the Withdrawal Agreement.

The scrutiny process in the European Parliament is in its final stages. Indeed, on Thursday 23rd, the Committee on Constitutional Affairs (AFCO) of the European Parliament approved a recommendation to the plenary to give its consent on the Withdrawal Agreement. The final vote in the plenary will take place on Wednesday 29th January in Brussels and Member States will follow just in time to make the UK’s departure happen on 31st of January. This will trigger a transition period that is to last until the end of the year. During that time the UK stays in the EU’s internal market with all rights (including in financial services) and obligations this entails. Until the end of the year, not much will change. Should the UK Prime Minister ask an extension of the transition period, he can do so until the middle of the year although he has already repeated that he has no intention of doing so.

During the transition period, the EU and the UK are to negotiate a future relationship agreement. The crux for banks is that although aspects like the movement of persons and data protection might be included in that agreement, financial services will not. Access from the UK and the use of UK facilities will be governed by EU law in respect to third countries as well as third country equivalence decisions.

The latter are targeted Commission decisions that are allowed in specific articles of a number of EU legislations and that follow a positive assessment of the equivalence of third country laws and provisions.  Examples of such provisions in EU law can be found a.o. in EMIR, MiFID, the prospectus regulation, the transparency directive or the capital requirements regulation (CRR). It seems that the European Commission aims at finalizing the assessments by mid 2020 although the actual decisions are expected to be taken much closer to the end of the transition period. One would expect that these assessments should not be too difficult an exercise as the UK is and will until the end of the year still be applying EU law. The crux is nevertheless that in its July 2019 communication the Commission has stressed that such an equivalence decision is no automatic right even if the third country ticks all the boxes.

The Commission also introduced the concept of high impact jurisdictions where the assessment is expected to be particularly thorough. A prime example of such a high impact jurisdiction is of course the UK given the size and the interlinkages of the EU with the City of London. That the UK government is stressing its legislative independence and its intention to diverge from EU legislation doesn’t favor equivalence either. The Commission handing out to the UK third country equivalence decisions in all cases is therefore not a given post-Brexit.

By Antoine Kremer, Head of European Affairs, ABBL & ALFI

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