Financial Services Brexit Update – Hard Brexit On The Horizon

The UK financial services industry is now headed for a “Hard Brexit” on the 31 December 2020 following the UK Government decision not to request an extension to the Transitional Period by the deadline of 30 June.

Complyport’s CEO, Paul Grainger, Chairs the Brexit Working group of the Association of professional Compliance Consultants (APCC). He recently joined an FCA Brexit Trade Body call during which the FCA provided updates on the future of the EU-UK partnership and the FCA’s role in preparing for Brexit.  The FCA’s Head of International, Nausicaa Delfas, repeated that the FCA has been working persistently to ensure a smooth Brexit transitional period which is set to end on 31 December this year.

The FCA explained that during the first week of June the UK Government and the EU entered into the 4th and final round of trade agreement talks. Following the final round of talks, the Government had to indicate whether an extension to the transitional period was needed. The UK Government had repeatedly stated that no extension would be requested and it was therefore no surprise that no extension to the Transitional Period was requested.

It has already been indicated by the EU and the UK Government that any trade agreement is unlikely to cover financial services. Instead, each of the Directives and regulation covering the various aspects of the Single Financial Services Market must be addressed separately and on a case by case basis. The process is known as Equivalence assessment. In this process,  the UK and the EU can agree on a case by case basis whether there are similarities in laws and regulations in specific areas of financial services and that they can be deemed sufficiently similar to meet the Equivalence assessment. Where Equivalence is agreed, this will facilitate cross-border financial services for the specific market or services covered by that specific Equivalence assessment.

There are some significant obstacles. Not least of these is that Equivalence does not apply to services or product aimed at savers or investors who are classified as  retail clients. (The vast majority of the population will normally be classified as retail clients.) Additionally, unless provision for Equivalence is already written into a Directive or Regulation, there is no legal power to provide for an Equivalence assessment. Not all Directives or Regulations governing financial services within the EU contain Equivalence provisions.

In the meantime, the FCA and the rest of the EU are working to identify possible similarities between the UK and European laws and regulations. Although it will be impossible to have the same law in each case, equivalence judgements will need to be based on “equivalent outcome”. To achieve that the Treasury and the FCA are working to try to “onshore” EU legislation and regulations by way of making UK Statutory Instruments. To date, the Treasury has laid 62 Statutory Instruments, and the FCA has published 1808 pages of rules. This process will continue during this year, with new instruments such as EMIR 2.2 and amendments to EU prospectus, money laundering, and low carbon benchmarks legislation being onshored in the next months.

The FCA will continue to use its Temporary Transitional Power (TTP), so that European firms and funds, which are currently doing business from the EU into the UK through passporting, can continue to have access to UK markets at the end of the Transition Period without disrupting their activities.

The initial Equivalence Assessment work between the UK and the EU was intended to have been completed by the end of June 2020. It must then be subject to scrutiny, acceptance or rejection of Equivalence. Even though the target is to achieve this by the end of 2020, it is not guaranteed as it is subject to political oversight.

The FCA confirmed that the outcome of Equivalence Assessment will not include any equivalent of the current passporting regime. UK firms that wish to conduct business in other EEA countries will need to apply for permission to the local regulator(s) in each country in which they wish to do business.

How we can help

Should you need any guidance or assistance in dealing with matters relating to compliance with FCA or related regulatory matters in general, please contact:

  • Jonathan Greenstein

e-mail: phone: +44 (0) 20 7399 4132

  • Graham Levi-Samper

e-mail: phone: +44 (0) 20 7399 4991

  • Simon Chapman

e-mail: phone: +44 (0) 20 7399 4135

  • or your usual Complyport Consultant on +44 (0) 20 7399 4980