Brexit: Draft UK EU Withdrawal Agreement

Of relevance to: All firms in the UK’s financial services sector
Key date: 29 March 2019

The Draft Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community (“Draft UK EU Withdrawal Agreement”) was published on 19 March 2018, showing the agreed transitional period will last from Brexit day on 29 March 2019 until 31 December 2020, a period of 643 days (just over 21 months). There is no specific mention of the financial services industry within the document.

No definitive paper can be written on the Brexit effect on our industry until such time as the UK and EU make more concrete decisions. However, much comment is being made about the two sides using terms such as “mutual recognition” and “equivalence” to describe the post-Brexit relations they seek, but nothing has yet been decided.

Equivalence provisions can be found in many areas of the financial services industry in Europe and throughout the world (whereby each jurisdiction checks whether the other’s regulations achieve a similar outcome to its own), and it appears equivalence is the fallback option if the UK and EU fail to agree a deal. Mutual recognition is a founding principle of Europe’s single market for financial services, but the EU is moving beyond mutual recognition towards a single rule book and common supervision.

This further complicates the politics of providing access to non-EU countries and thus the UK (to be known as a ‘third-country’ after Brexit).

Most of the comment in recent days stems from a Bloomberg article based on a draft document not seen in public, following a speech by the UK Chancellor of the Exchequer, Philip Hammond, on 7 March 2018 in which he explained why it makes sense, for both the UK and the EU, to collaborate closely on cross-border financial services.

The new wording is, according to Bloomberg, in an annex to the draft guidelines for discussion among EU ministers. Earlier drafts didn’t mention financial services explicitly, and made clear that the trade agreement the EU intends to strike with the UK wouldn’t make special provisions for services.

Apparently, the latest draft of the EU’s negotiating stance says the bloc will consider offering the UK “improved equivalence” for its financial services. That may mean, for example, the EU will only let UK banks access its market for as long as it considers British rules to be equivalent to the EU’s. This is a potentially unstable arrangement as the EU can rescind it at short notice.

In his speech on financial services at HSBC’s Canary Wharf headquarters, Mr Hammond said “this may appear to point to a solution based on the EU’s established third-country equivalence regime. But that regime would be wholly inadequate for the scale and complexity of UK-EU financial services trade” and “it is hard to see how any deal that did not include services could look like a fair and balanced settlement”. He also reminded his audience that “We will start from a unique position… …with full alignment on Day 1”.

It is understood the new draft says “Regarding financial services, the aim should be reviewed and improved equivalence mechanisms, allowing appropriate access to financial services markets, while preserving financial stability, the integrity of the single market and the autonomy of decision making in the European Union. Equivalence mechanisms and decisions remain defined and implemented on a unilateral basis by the European Union.”

The main problem with “improved equivalence” seems to be the need for the UK to accept, and adopt in the UK, whatever changes are made to EU rules, without having the option to debate and influence those changes before implementation. It’s doubtful Brexiteers were expecting that outcome.

Complyport will, of course, provide further articles as new definitive information is released at EU and/or UK level.

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