The authoritative source for independent research on UK-EU relations

08 May 2019


UK-EU Relations

Less attention has been paid in relation to the UK’s trade in services in the post-Brexit era than is warranted. Services are both more tightly regulated and less-internationally liberalised than goods and could present some problems for UK, particularly since services are such an important aspect of the UK economy.

As with many World Trade Organization (WTO) members, the EU’s 27 members have not made extensive commitments under the General Agreement on Tariffs and Trade (GATS) for market access and non-discrimination, especially in relation to Mode 2 (cross-border) supply of services. This could represent a challenge for a number of the UK’s services industries.

It may be possible to circumvent some of these regulatory barriers by establishing a meaningful commercial presence within the EU – indeed, it appears as though several financial institutions have already done this. It is worth noting that euro clearing has been allowed by Brussels, at least for the short term, alleviating some of the concern related to a no-deal scenario for this sector.

The legal profession also stands to suffer from diminished access to the EU as the Lawyer’s Establishment Directive (allowing rights of practice to lawyers qualified in any EU member state to practice anywhere within the EU) will no longer apply to UK-qualified lawyers. There may be various ways for UK lawyers to mitigate this impact, for example by qualifying in Ireland or by providing advice in conjunction with an EU-qualified practitioner.

The issue is complicated by the fact that each EU member state imposes different regulatory requirements on their legal practitioners, and in some states it will be difficult for foreign lawyers (including UK lawyers after Brexit) to offer advice on EU law, for example, without having EU nationality. Clients seeking EU law advice are already beginning to abandon London in favour of centres on the continent. The provision of legal advice in relation to home state law or international law should be somewhat easier.

There is some concern that after Brexit there will be no automatic enforceability of judgments issued by UK courts throughout the EU, requiring additional judicial procedures in EU member states where assets may be held. This may represent a further threat to the dominance of London as the choice of forum for large commercial claims. Others believe that London’s legal expertise coupled with the desirability of the common law will prevent this outcome.

A shift away from the courts to commercial arbitration, with near universal enforceability under the New York Convention, could similarly counter these fears, as London offers extensive expertise in this kind of dispute settlement.

A comprehensive free trade agreement (FTA) between the UK and the EU would go some way towards rectifying the weaker access for services, but even here the full integration currently available under the single market would almost certainly be unavailable. The Comprehensive Economic and Trade Agreement (CETA) with Canada, often thought of as a blueprint for future UK-EU trade relations, provides for various mutual recognition arrangements with respect to professional qualifications, establishing a joint committee for such matters.

However, as it stands, this is little more than an agreement to agree; there is no mutual recognition for legal services, for example. Were the UK to obtain a similar FTA to CETA, there is no indication that this arrangement will grant UK lawyers practice rights in EU member states, although it is conceivable that UK legal training may be recognised for the purposes of re-qualifying in an EU member state, precluding the need to take additional training at a law school in the EU.

For financial services, a scheme of enhanced equivalence has been proposed which would allow the cross-border supply of financial services on the basis of shared outcomes (such as consumer safety and macroeconomic prudence) allowing the UK and the EU to deviate in terms of their specific regulatory structure with minimal intrusion into services flows. The EU has offered similar arrangements to other countries and may do so for the UK in the context of an FTA, although this cannot be taken for granted.

The CETA includes commitments on financial services but it is far from complete. For example, it contains a broad prudential carve-out which could impact cross-border trade in this service significantly.

While diminished access for financial services under a UK-EU FTA is a cause for concern for many, others have noted that after Brexit the UK should be able to take advantage of regulatory autonomy in this area since many of the EU’s financial regulations have stifled business in the UK, such as in relation to insurance and asset management. The Markets in Financial Instruments Directive (MiFID) has been heavily criticised as burdensome and inefficient, and could be replaced with a British regulation designed to suit the needs of the domestic industry and its clients.

Services are less geographically dependent than goods, suggesting that the UK should be able to secure FTAs with third states around the world in relation to services. However, this will likely involve the UK trading access to its goods market.

Such a bargain will almost certainly be the case with the US, seemingly the most lucrative market beyond the EU. Enhanced access to the US financial services market would be very economically advantageous for the UK but this will probably mean accepting US agricultural products, many of which conform to regulatory standards which are less stringent than those of the EU. Some will welcome such imports as conducive to greater competition and lower prices, much as competition from US companies in various services sectors could represent a boon for consumers.

FTAs with the Commonwealth, especially Australia, New Zealand and Canada are likely also forthcoming. These countries, along with Japan, have expressed an interest in the UK joining the Comprehensive Progressive Trans Pacific Partnership (which would also grant enhanced access for services) although Japan in particular has indicated that it would prefer to see the outcome of the UK’s negotiations with the EU before it pursues this option more vigorously.

By David Collins, Professor of International Economic Law, City, University of London.


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