The UK-EU Trade and Cooperation Agreement (TCA) is typical of free trade agreements and does little to facilitate access to the EU’s single market for UK financial services from 1 January 2021. In a document stretching to over 1200 pages, ‘financial services’ appears six times (‘fish’ appears sixteen).
The TCA does not (and was not intended to) make provisions for financial services firms in the UK to access the single market. As a result, from the 1 January 2021, UK financial services firms will lose their passporting rights. Passporting has allowed firms to sell their services into the EU from their UK base without the need for additional regulatory clearances.
This is important because financial services is an export success for the UK and has developed significant EU export markets on the back of passporting arrangements (around 40% of the sector’s exports go to the EU).
In order to continue to access the single market without passporting, UK based financial services firms will either have to comply with the different requirements of individual member states or rely on equivalence decisions.
Neither is a like for like replacement for the EU wide common access facilitated through passporting. Seeking permissions on a state by state basis would add complexity and hence costs for financial services firms.
Meanwhile equivalence does not cover the same range of financial services activities. Core banking services such as lending, payments and deposit taking are excluded, for example. Neither do they guarantee permanent access rights. The EU can withdraw equivalence determinations with 30 day’s notice.
Given the importance of equivalence for continued market access, the UK and the EU agreed in the 2019 Political Declaration to try to conclude their equivalence determinations by mid-2020. This ambition was not met.
In November 2020, Rishi Sunak announced that the UK would be granting equivalence from 1 January 2021 to EEA based financial services in areas such as credit ratings agencies and derivatives trading. To date, the EU has taken a more cautious approach and only granted time limited equivalence decisions for derivatives clearing (for 18 months) and settling Irish securities (for 6 months).
Boris Johnson has said that the deal “perhaps does not go as far as we would like” reflecting the UK’s aim of securing a more stable form of equivalence with longer notice periods than the EU uses.
Whilst equivalence is not negotiated and isn’t therefore formally part of the TCA negotiations, the TCA offers the possibility that favourable equivalence decisions for UK financial services firms may be made relatively quickly by the EU. Certainly, one might have expected far more problems in the event of a no deal outcome.
Indeed, the European Commission explicitly identifies future equivalence decisions in financial services as one of the potential unilateral measures that the EU can adopt within a wider set of ‘pillars of cooperation’ with the EU.
However, the TCA provides few concrete signs that the 28 outstanding areas of equivalence being considered by the EU will be resolved imminently. The EU has stated that it requires further information in order to make these decisions, particularly in relation to potential regulatory divergence by the UK from the EU in the future.
In the absence of outstanding equivalence decisions, from the 1 January 2021, financial services trade from the UK to the EU will be based on more limited single market access than firms based in other leading financial centres such as New York and Singapore.
The UK has implemented a Temporary Permissions Regime to support EEA based firms operating in the UK with a passport.
There is no equivalent EU wide scheme for UK firms operating in the EU although some member states such as Ireland and Denmark have established temporary permissions in particular parts of financial markets for specific periods of time from 1 January 2021.
The TCA is accompanied by a non-binding Joint Declaration committing the UK and the EU to cooperation on matters of financial regulation. This is intended to be facilitated by a Memorandum of Understanding due to be agreed by March 2021. This will not be unique to the UK – similar commitments are in place currently between the EU and the US and Japan for example.
A general commitment to regulatory cooperation is no replacement for certainty regarding single market access for UK financial services firms. Many have already planned for this eventuality by moving parts of their operations to cities such as Paris, Frankfurt, Amsterdam and Dublin. The TCA does little to suggest that such moves will stop from 1 January 2021.
The TCA also creates further uncertainty for UK financial services. How is the government intending to use its newfound regulatory control of the financial services sector? Throughout the Brexit negotiations, different policy goals have been floated. The Treasury has emphasised a commitment to an internationally open financial system, noting the importance of ensuring that the UK adapts its regulatory framework to support this ambition.
Meanwhile Rishi Sunak has identified the importance of enrolling finance into wider green economic recovery policies and supporting the development of digital finance.
He is right to note that the future of the sector is not just a London issue. It contributes around £130 billion to the UK economy and 1.1 million jobs. For example, in Edinburgh around 10% of jobs are in financial and related professional services.
But there is scope to extend this regional focus beyond the size of the sector itself. More effectively using finance to support economic growth beyond London and the South East will be essential in addressing the UK’s persistent economic regional inequalities, inequalities that are likely to be exacerbated by the Covid-19 pandemic
These different versions of post Brexit UK financial services are not necessarily mutually exclusive. But providing clarity on how domestic regulatory control will be used alongside the terms of future single market access for UK financial services firms will likely shape post Brexit financial services in the UK more profoundly than the TCA.
By Professor Sarah Hall, senior fellow of UK in a Changing Europe.