It was with relief that the European financial industry welcomed the conclusion of the agreement on future relations between the European Union and the United Kingdom (see EUROPE 12628/6). Although it does not settle the issue of financial services, the agreement is widely seen as a guarantee of good future cooperation by the stakeholders, who are now awaiting a breakthrough in the sectoral discussions. This is an overview of initial reactions and expectations.
The financial industry does not hide the fact: bilateral discussions on financial services still have a long way to go. Indeed, the trade agreement remains almost silent on this issue, apart from the general provisions on compliance with international standards traditionally found in other EU trade agreements.
This result is not really a surprise for our contacts, since the European Commission has always been clear on this subject: the fate of financial services will be governed by frameworks of equivalence between UK and European regulations.
The institution launched its evaluation process in March 2020 and originally planned to finalise its analysis in the summer. It finally requested a series of additional clarifications from the United Kingdom, in particular on how the country intends to diverge from European rules in the future (see EUROPE 12590/15).
“Before Christmas, we found that we still needed more information on this subject. That is why we have taken the decision not to adopt equivalences on the 28 areas at this stage. We will continue to discuss, as we would for any non-Member State”, explained a source within the Commission.
Some expected more, however, such as the Association of Chartered Certified Accountants (ACCA). “The agreement brings clarity in terms of movement of people and tariffs. But it is not complete and on financial services and services it doesn’t go as far as we would have wished”, said Maggie McGhee on behalf of the organisation.
The really positive element, according to the financial industry, concerns the joint declaration in which both Parties agree to establish, by March 2021, a Memorandum of Understanding (MoU) determining the framework for “structured cooperation” in the area of financial regulation.
“This is very important to give predictability and foster trust and constructive cooperation”, said Vincent Ingham, Director of Regulatory Affairs at the European Fund and Asset Management Association (EFAMA).
But there is a risk of claiming victory prematurely! “This process is without prejudice to our decision on equivalence and does not constitute a guarantee of access to the single market. This does not mean that in March we will have equivalence decisions for all 28 areas”, the same source from the Commission stressed.
Nicolas Véron, a researcher at the Bruegel think tank, does not expect much from the current process. “The issue of equivalence decisions [...] is a fairly minor issue, since the EU is unlikely to grant equivalences that it did not necessarily offer before the UK withdrawal. If there are equivalences for certain market segments, it will be very partial, because this procedure does not cover the whole market”, he considered.
No major disturbance observed in the short term
In the absence of equivalence decisions, UK financial services lost their ‘European passport’ on 1 January 2021, which had allowed them to market their financial products anywhere in the EU on a cross-border basis.
While the UK has already granted equivalence to European financial companies in several areas, the Commission has so far taken only two equivalence decisions—urgent for the sake of ensuring the financial stability of the EU—one on central clearing houses (see EUROPE 12564/9) and the other on central securities depositories.
In London, officials ensure that Brexit has not destabilised the City. Since the beginning of January, however, a real migration of trading in EU-listed shares from UK platforms to European platforms has been observed.
“The Trade Agreement is not changing a lot for our industry. But Brexit in itself in a game changer. For the asset management industry, Brexit only comes with downsides. It makes it more difficult to serve our clients cross border or to trade on venues on the other side,” said Mr Ingham of EFAMA.
However, no major disruption has been noted on the European side, as the industry has prepared itself well, guided in particular by the fear of a ‘no deal’. “It took a lot of effort and contingency planning to find ways to mitigate this negative impact. The current experience, since the 1 January, shows that assets managers were well prepared. No significant disruption in the way we serve our clients or distribute our products has been observed”, he said.
The same was true of the Association for Financial Markets in Europe (AFME), for whom the banks were also well prepared to continue to serve their customers with as little disruption as possible.
There is a tectonic shift in the banking sector, according to Mr Véron. “Many banks will repatriate to the EU financial assets that were previously booked in London. There will be a transfer of assets from the UK entity to a European entity, mostly in the euro area for prudential supervision reasons. This is how JP Morgan became the 6th German bank in the autumn”, observed the researcher.
Some even argue that the absence of major disruptions at present is due to changes in the business model of non-financial companies. In order to continue refinancing with less reliance on the City, many companies have reportedly taken steps in fear of a breakdown in negotiations, steps that they might not have taken if they had had greater visibility and legal certainty about the outcome of negotiations.
The EU will act in its own interest
The European Commission has repeatedly stated that it will take equivalence decisions when it is “in the interest of the EU”.
The financial industry agrees, but asks that this process be free of political pressure. “We expect equivalence to be granted each time it is justified, on the basis of a technical analysis of the UK regulation versus the EU regulation, on that basis only and not on the basis of some political considerations”, Mr Ingham emphasised.
EFAMA also hopes that the MoU will provide more predictability on the possibility to withdraw equivalence in case of divergences. “It is clear that over time the EU regulation and the UK regulation will evolve and that, almost certainly, divergences will appear at some stage. We should keep in mind that the equivalence determination will remain a unilateral decision, it is not mutual recognition”, said Mr Ingham.
“For some markets, it will be easier. Of course, a pan-European negotiation will be more challenging than on a country-by-country basis. We have to look at the mutual benefits between the different Member States and at where the negotiations will be positive for both sides”, Ms McGhee provided on her part.
Vigilance in the European Parliament
For the European Parliament, too, future discussions will be closely scrutinised.
Satisfied that an agreement has been reached, Markus Ferber (EPP, Germany) rather expects limited equivalence to be granted. “I think there is a misunderstanding in the UK about what equivalence means. There will never be a general rule for equivalence. If you look to the previous equivalence decisions that were granted, it is always on a very detailed, structured and clear issue”, he stressed.
For Stéphanie Yon-Courtin (Renew Europe, France), “the British will be very active in trying to keep access to the European market for financial services as close as possible to that before 1 January 2021”. “I will continue to ensure the protection of European citizens and businesses, in the short term in the possible granting of equivalence for the UK financial sector, and in the medium term to ensure that all existing or future European sectoral rules on non-Member States are watertight and prevent the risk of regulatory dumping”, she emphasised.
Disappointed by the weakness of the provisions on tax evasion and money laundering in the agreement, Belgian Philippe Lamberts and German Sven Giegold of the Greens/EFA group, for their part, asked the Commission to use the equivalence determination process as leverage to obtain a strong commitment from the country against tax dumping (see EUROPE 12630/9).
Asked about the possible regulatory divergences to be expected in the United Kingdom, Mr Ferber considered that a first test will be the implementation of the ‘Basel III’ prudential framework for the banking sector (see EUROPE 12347/15).
“[Basel III] will be the first experience of how divergences will occur. It will be interesting to see how the UK will implement this compared to the EU compared to the US, compared to China. We will see if the UK is aligning on the EU camp or more on the US camp”, stated Mr Ferber.
One thing is certain: the saga of Brexit is far from concluded.
See the Trade and Cooperation Agreement between the EU and the United Kingdom: https://bit.ly/3s3wH1R
See the joint statement on financial services: https://bit.ly/2MzBDer (Original version in French by Marion Fontana and Mathieu Bion)