Although the UK already left the EU a year ago, for practical purposes Brexit happened only on 1 January of this year. For an event that has been building up for 4 ½ years, it was rather underwhelming. No financial markets crash, no end of the world. This pays homage to the level of preparedness of financial institutions. Even from EU officials I can read a “well done” between the lines.
One element of this preparedness is that there was nothing to be expected from the last-minute EU-UK trade and cooperation agreement (TCA). For sure there is a chapter on financial services, but as expected it is as light on content as if there was none. The highlight is a paragraph committing the Parties to implement internationally agreed standards in the financial services sector for regulation and supervision, AML as well as tax evasion and avoidance. It continues by listing the G20, the FSB, the BCBS, IOSCO, the FATF and the Global Forum on Transparency and Exchange of Information for Tax Purposes. Nobody currently would expect neither the UK nor the EU to renounce these standards, but at least the paragraph has the merit of making the commitment legally binding.
The TCA also includes a.o. some minimal language on AML, digital trade, data protection as well as on cooperation on cybersecurity, movement of people and social security coordination.
With the passport gone for financial institutions on both sides of the Channel, the remaining bits are the potential of unilateral equivalence decisions in the limited areas of financial services legislations where these are foreseen. The mutual assessments of the other’s framework has now been dragging on for the best part of a year. One could wonder what is happening as the frameworks are de facto the same, the UK having been held to them until the very last moment of the transition period that has just ended. The reason is at least two-fold.
- For one, financial services and in particular UK access to the Single Market have during the whole phase of negotiations been seen as a bargaining chip. Beyond two very narrow equivalence decisions on CCPs and CSDs – given for financial stability reasons – the EU has refused to grant any further accesses.
- Secondly the EU assessment does not only consider the current status of the UK legal framework. It is also forward looking. Will the UK change its rules in the near future? It will for sure. Will the EU? Very much so. Both sets of rules and laws are by essence moving targets.
Furthermore, the prospect of a “Singapore on Thames” is a very vivid concern in minds of EU lawmakers and civil servants. The UK Chancellor of the Exchequer announcing a “Deregulation 2.0” does not help to alleviate any such fears. And the memory of a UK government member defending a “targeted breaking of international law” neither. On the other side, the UK perceives itself as having won back its sovereignty from Brussels’ constraints and is wary of its big neighbor imposing laws and standards by the backdoor.
Trust is a precious commodity that can quickly be lost. But it can also be built up, although less quickly. The EU and the UK can count on four decades of EU membership and knowing each other’s institutions and functioning. That is a start. The above-mentioned trade and cooperation agreement by its sheer existence is another building bloc. Only a month ago we were on the brink of an all-out hard Brexit. The TCA is a significant step in the bigger picture. Most relevant of all is nevertheless a joint declaration on financial services attached to the agreement.
The joint declaration is all about predictability and trust building in general and in particular with a view to equivalence decisions. As the latter are the cornerstone and the only agreed way forward in financial services, the content of the declaration and its implementation are key.
Both sides agreed to establish a “structured regulatory cooperation in financial services”. The latter for one aims at “bilateral exchanges of views and analysis relating to regulatory initiatives”. It is all about informing what lies ahead in each other’s regulatory pipeline and avoid unwelcome surprises. This will also allow the other side to point out whether an initiative might trigger a re-assessment of an already granted equivalence decision.
The above-mentioned arrangements also aim at “transparency and appropriate dialogue in the process of adoption, suspension and withdrawal of equivalence decisions”. In the process the EU and the UK are to discuss “how to move forward on both sides with equivalence determinations”.
The joint declaration and the ensuing negotiations are to end in a Memorandum of Understanding by March 2021. In this it can build on the existing structure regulatory dialogue with the United States which is likely to be taken as a template potentially to be improved.
Equivalence decisions will not rain down on financial institutions in the foreseeable future. It will be more of a case by case process once the regulatory dialogue has started working. Until then banks will need to make do with what they have put in place preparing for Brexit and learn from the experience gathered in these first few weeks of 2021.
By Antoine Kremer