Do you know what to do?
The EU and the UK Brexit deal sealed on Christmas Eve did not feel like much of a Christmas present for those like me who traditionally open their Christmas presents on that day – called “the day of generosity” too! Being a finance lawyer, my heart “skipped” a beat – if capable of that after the events of 2020. Unfortunately, so far as financial services are concerned there is not much of a deal.
EU/UK firms have lost the right to passport.
In other words, they can no longer provide financial services in each other’s territories based on their home country authorisation.
The EU/UK discussions around the equivalence determinations – are ongoing and likely made on an exclusively unilateral basis, at least for the immediate future.
What is the Brexit Trade Deal?
The trade deal concluded between the EU and the UK is set out in the EU-UK Trade and Cooperation Agreement (the “EU-UK TCA”).
The EU-UK TCA is applicable on a provisional basis since 1 January 2021. This is pending the completion of the procedures necessary for its formal entry into force. It is about 2,000 pages long.
It consists of seven parts, several annexes and protocols and is supplemented by two further agreements, namely an Agreement on Security Procedures for Exchanging and Protecting Classified Information, which supplements the TCA, and a separate Nuclear Cooperation Agreement.
To help us all navigate a little through the deal, The European Commission (the “Commission”) has published Q&), together with several related documents.
The deal is not set in stone and is to be reviewed every five years.
What is in the EU-UK TCA?
A bit counterintuitive, as far as financial services go, as there is a little “free” flow of trade, but this is a free trade agreement.
The deal covers areas such as: trade in goods and in services, digital trade, intellectual property, public procurement, aviation and road transport, energy, fisheries, social security coordination, as well as law enforcement and judicial cooperation in criminal matters, thematic cooperation, and participation in EU programmes.
To what extent the EU-UK TCA deals with financial services?
In short, it contains:
(1) general provisions (Title II of Part Two of the EU-UK TCA) governing investment and services, including financial services,
(2) a specific section on financial services (at pages 121 – 125), such as;
permit UK /EU financial service suppliers to supply any new financial service that it would permit its own financial service suppliers to supply in accordance with its law, provided that the introduction of the new financial service does not require the adoption of a new law or the amendment of an existing law (this does not apply to branches);
grant UK /EU financial service suppliers access to payment and clearing systems operated by public entities and to official funding and refinancing facilities available in the ordinary course of business.
(3) provisions regarding restructuring subsidies for banks, credit institutions and insurance companies, addressing anti-money laundering and counter terrorist financing; provisions on capital movements, payments, transfers and temporary safeguard measures; and
(4) a Joint Declaration on Financial Services Regulatory Cooperation (the “Joint Declaration”).
What does the Joint Declaration say and why is it important? Does it constitute “equivalence”?
We do not have equivalence regime, but at least a promise of a future dialogue gives us some comfort. There is no clarity as to what shape this dialogue is likely to take and in particular whether and how it will impact on the EU’s existing equivalence framework.
The Joint Declaration provides as follows:
“1. The Union and United Kingdom agree to establish structured regulatory cooperation on financial services, with the aim of establishing a durable and stable relationship between autonomous jurisdictions. Based on a shared commitment to preserve financial stability, market integrity, and the protection of investors and consumers, these arrangements will allow for:
bilateral exchanges of views and analysis relating to regulatory initiatives and other issues of interest;
transparency and appropriate dialogue in the process of adoption, suspension and withdrawal of equivalence decisions; and
enhanced cooperation and coordination including in international bodies as appropriate.
2. Both Parties will, by March 2021, agree a Memorandum of Understanding establishing the framework for this cooperation. The Parties will discuss, inter alia, how to move forward on both sides with equivalence determinations between the Union and United Kingdom, without prejudice to the unilateral and autonomous decision-making process of each side.”
Will UK/EU financial service providers be able to continue to passport their services into the territories of the other under the EU-UK TCA?
No – you can no longer rely on your domestic business “license”, domestic business passport to get through the “borders” – to provide cross border services into the other country’s territory. Compliance with local (including EU) authorisation/licensing requirements is needed when setting up establishments and provide services into the territory of the other country/party.
The EU-UK TCA provides that once authorised/licensed (where applicable), such firms and investors will benefit from national treatment – meaning no less favourable treatment than the most favourable treatment accorded by each UK and EU to its own investors and firms.
Does Brexit mean that a UK financial service provider that wants to provide financial services in an EU Member State will need to be authorised/licensed in that Member State?
It depends on an individual Member State, as each may permit the provision of certain financial services without authorisation/licensing requirements. Some jurisdictions prescribe certain conditions or created a Temporary Run-Off Regime (TRR), such as Ireland for a time-limited period of 15 years.
Also, even though, most EU laws on financial regulation adopted in recent years allow third country firms to provide financial services into the EEA on the basis of an EU Commission assessment that the relevant third country’s domestic regulatory framework achieves outcomes “equivalent” to those of the EU’s framework, such “equivalence” does not cover many core banking and financial activities, like accepting deposits, providing investment services to retail (non-professional) investors or payment services.
Equivalence decisions can be withdrawn at short notice and may be affected by political considerations, such as the equivalence decision for derivatives clearing. In this case the Commission actually encouraged to “develop strategies that will reduce a reliance on UK central clearing parties.”
How many equivalence decisions has the Commission taken so far with regard to the UK?
Only two, so far; as the Commission cannot finalise its assessment of the UK’s equivalence in 28 areas pending further clarifications. The key unknown are:
how the UK will diverge from EU frameworks after 31 December 2020;
how it will use its supervisory discretion regarding EU firms; and
how the UK's temporary regimes will affect EU firms.
As far as the share-trading obligation goes, the European Securities and Markets Authority (“ESMA”) has published guidance, clarifying its position as on the derivatives-trading obligations under Article 28 of MiFIR. This does not constitute the relevant equivalence, this decision is still needed.
What should a UK financial services firm do if it wants to provide services or set up an establishment in another Member State?
As a first step, the UK firm should establish whether or not it requires authorisation to provide the relevant services. If it does, it will then need to make an application to the Member’s State central banks, or other local regulatory and supervisory authority. There may be as many applications as Members States…It is worth checking the regulators websites, undergo some preliminary research.
Will another Member State’s authorised financial services (e.g. funds, asset managers) firm be able to continue outsourcing/delegating some of its investment management functions to a service provider in the UK?
There are several memoranda of understanding (“MoU”) between ESMA and EU national securities regulators on the one hand and the UK’s FCA on the other – these aim to address the level of a continuance, control and oversight.
Will the EEA financial services firm be able to continue to provide services into the UK without further authorisation?
As part of the UK’s preparations for Brexit, the UK Government established the Temporary Permissions Regime (the “TPR”) for firms based in the EEA, and the temporary marketing permissions regime (the “TMPR”) for EEA-based investment funds. The TPR and TMPR each allow relevant EEA based entities that were passporting into the UK on 31 December 2020 to continue operating in the UK for a limited period after the end of the transition period, subject to compliance with a notification requirement.
Alongside the TPR, the UK Government has created the financial services contracts regime (the “FSCR”). This allows, for a limited period, EEA passporting firms not in the TPR to continue to service UK contracts entered into prior to the end of the transition period (or prior to when they enter FSCR) in order to conduct an orderly exit from the UK market now that the transition period has ended.
The extent to which an Irish, German, French, Dutch, Spanish…and so on… authorised firm will be able to provide services into the UK over the longer term will depend on applicable UK law.
Brexit and Financial Services Update by Beata Dunn, Partner at Aria Grace Law