For many in the financial services sector the UK and EU Trade and Cooperation Agreement (the Agreement) finalised on 24 December 2020 came as an expected anti-climax. The Agreement applies a distinctly light touch to financial services, without provision for financial services passporting or an equivalence framework, leaving us with a position some might say approximates to a 'no-deal' for the sector. The Agreement does provide for marginally broader market access rights for financial services than would be the case under the default WTO/GATS rules (which would have applied in a no-deal scenario) but it does mark a step change from the single market rights previously enjoyed.

The reality is that, as for so many other areas, for financial services the Agreement is just the beginning. The need for established regulatory cooperation on financial services between the UK and EU is recognised in the parallel Joint Declaration which commits the EU and the UK to agree a Memorandum of Understanding (the MoU) establishing a financial services cooperation framework by March 2021.

What is in the Agreement?

Four key provisions for financial services in the Agreement are:

  • International agreements: a best endeavours commitment by the UK and the EU to implement and apply internationally agreed standards in the financial services sector for regulation and supervision, for the fight against money laundering and terrorist financing and for the fight against tax evasion and avoidance, such as those adopted by the G20, the Financial Stability Board, the Basel Committee on Banking Supervision, the International Organisation of Securities Commissions, and the Financial Action Task Force.
  • Prudential carve-out: mirroring a core GATS principle, the freedom of either party to adopt or maintain measures for prudential measures, including for the protection of investors, depositors and policy holders, and to ensure the integrity and stability of its financial system. In other words each party could, if it considered it necessary for prudential purposes, discriminate against financial services suppliers based in the state of the other party.
  • No discrimination for new financial services: the requirement on each party to allow firms established in the territory of the other party to supply new financial services which its own domestic financial service suppliers are permitted to supply in accordance with its laws.
  • Self-regulatory bodies and payment and clearing systems: the commitment by each party to allowaccess to self-regulatory bodies and payment and clearing systems operated by public entities to financial service suppliers of the other party.

What is not in the Agreement?

  • 'Most favoured nation' principle for financial services: financial services are carved out from the 'most favoured nation' clauses meaning neither the UK nor the EU can claim any more favourable treatment granted by the other in their future financial services agreements with other third countries.
  • Passporting: as expected, the Agreement makes no provision for financial services passporting. The UK's temporary permissions regime (TPR), which allows EEA firms operating in the UK via a financial services passport to continue to access the UK market for a further transitional period, is not mirrored in the EU so whilst EU firms operating in the UK can access the TPR, UK firms must seek local regulatory licences in each EU state they wish to carry on activities in. Most large UK financial services firms had implemented Brexit restructuring plans, including EU subsidiarisation, well in advance of the end of the Brexit implementation period to deal with the loss of passporting rights.
  • Equivalence: for some sectors the loss of passporting rights could be softened if UK firms could rely instead on the equivalence mechanism found in some EU financial services legislation to carry on business in the EU. Again, there was no surprise within the industry that the Agreement makes no provision for equivalency determinations; these will be the subject of MoU discussions.

What is next?

Some measured comfort can be taken from the commitment in the Joint Declaration to establish structured regulatory cooperation on financial services. The regulatory arrangements are to allow for 'transparency and appropriate dialogue in the process of adoption, suspension and withdrawal of equivalence decisions' and 'enhanced cooperation'. Discussions between the UK and the EU are to cover how equivalence determinations can be moved forward as between the parties.

It isn't clear at this stage what 'enhanced cooperation' might look like. It could involve the UK and the EU granting reciprocal equivalence determinations under the existing equivalence regime, and improving the patchwork nature of that regulatory framework, ideally extending it to include commercial lending and insurance. The likelihood of this is perhaps questionable, however, given the mismatched UK and EU approaches to granting equivalence determinations to the other thus far. The UK has granted equivalence to the EU in most areas, whereas the EU has only adopted time-limited market infrastructure equivalence decisions relating to the UK (covering central counterparties and central securities depositories).

Furthermore, the EU will naturally be looking out for the UK taking the opportunity to change or relax laws and regulations and diverge from the EU financial services framework. For its part, the UK, through the Future Regulatory Framework is exploring how the UK's overall approach to regulation of financial services needs to adapt to the UK’s new position outside the EU and to ensure the regulatory framework is fit for the future. HM Treasury's live consultationpoints out that leaving the EU gives the UK the opportunity to take back control of the decisions governing its financial services sector, allows the UK to be guided by what is right for the UK, and to regulate differently where necessary. Divergence could, however, come at the cost of EU equivalence.

For financial services, discussions in the next few months will be the key foundations of the future relationship between the UK and the EU. It will certainly be interesting to see how the MoU negotiations progress in 2021.


Lindsay Lee

Senior Associate

Marion MacInnes

Head of Banking and Finance & Partner