The Brexit White Paper and the financial services sector

23.07.18

On 12 July 2018, the UK Government published its long-awaited White Paper on “The Future Relationship between the United Kingdom and the European Union”, which the foreword from the new Secretary of State for Exiting the EU, Dominic Raab, describes as “a vision that respects the result of the referendum and delivers a principled and practical Brexit.” The paper is intended as a blueprint for further negotiations with Brussels, so any final deal will almost certainly be different to the content of the White Paper. However, it at least identifies the minimum degree of continued harmonisation with the EU that could be expected from any deal. In this legal update, we summarise some of the key points relating to financial services.


The Brexit blueprint has not necessarily been welcomed across the UK’s financial and related professional services sector, with representative groups describing the four pages of financial services proposals (out of the 100 pages in total) as “regrettable and frustrating” and a “real blow” for the sector.


The UK’s and EU’s financial services markets are highly interconnected, largely due to the EU single market and the so-called EU passporting regimes that enable banks and financial services companies authorised in one EU/EEA Member State to trade freely in the others with minimal additional authorisation. Firms based in “third countries” (non-EU countries) do not benefit, or at least not fully, from these facilitating regimes and so face significant regulatory barriers to providing cross-border banking and investment services in many EU Member States.


The UK is expected to become a third country as of 29 March 2019, leaving the EU and the single market. The sector’s preferred model for the future UK-EU relationship has always been the mutual recognition of each other’s financial services regulatory regimes, allowing business to continue (nearly) as usual. This had also been the UK Government’s position previously, but the White Paper no longer seeks mutual recognition as the basis of a post-Brexit relationship. Instead, it proposes to bring a concept described as “reciprocal recognition of equivalence” to the negotiating table in Brussels, proposing an enhanced version of the EU’s current equivalence arrangements with third countries. The current arrangements provide limited access for some third-countries to some areas of EU financial services markets.


The White Paper proposes a treaty-based “new economic and regulatory arrangement with the EU for financial services, preserving the mutual benefits of integrated markets and protecting financial stability while respecting the right of the UK and the EU to control access to their own markets – noting that these arrangements will not replicate the EU’s passporting regimes.” As part of this, the existing equivalence frameworks would need to be expanded, to reflect the particular interconnectedness of the EU-UK markets and encompass a broader range of cross-border activities. While the proposal suggests that each side would unilaterally determine equivalence autonomously, the new arrangement would include provisions for “common principles for the governance of the relationship; extensive supervisory cooperation and regulatory dialogue; and predictable, transparent and robust processes.”


The UK Government’s proposal seeks to reconcile two desires that do not sit easily with each other: to push for greater liberalisation of financial services markets through increased autonomy of decision making and the ability to legislate for the UK’s own interests, while still maintaining close cooperation with the EU in order to protect the UK and EU “shared interest in financial stability”. While the industry has welcomed the UK Government’s recognition that current equivalence frameworks would not work for the UK, the dominant feeling seems to be dissatisfaction with the proposals.


It is not possible to predict every detail of the post-Brexit future, and it remains to be seen what Brussels will make of the White Paper and its proposals for the financial services sector. However, one thing that is apparent is the growing sense of urgency within the sector that negotiations with the EU must now progress quickly in order to secure an effective financial services regulatory relationship with the EU, to minimise the fragmentation of markets and facilitate continuity of business for the industry and its customers.