On 13 November 2018, the EU and UK negotiators reached an agreement on the conditions for the withdrawal of the UK from the EU (the Withdrawal Agreement) and on 25 November, the EU and UK leaders approved the Withdrawal Agreement and reached an agreement on the political declaration regarding the framework for their future relationship (the Political Declaration). The Withdrawal Agreement is now due to undergo the formal parliamentary ratification process.
What does the Withdrawal Agreement cover?
In its nearly 600 pages, the Withdrawal Agreement sets out the conditions for the withdrawal of the UK from the EU, by among others, cementing the citizens' rights, designing the structure for judicial and administrative cooperation and procedures, temporarily maintaining the customs union, providing the framework for the relationship during a transition period and beyond as well as dealing with the financial bill to be settled by the UK.
Where do financial services stand?
There is no section in the Withdrawal Agreement specifically dedicated to financial services. Financial services are nevertheless mentioned in the Political Declaration that is meant to set out the terms of the future relationship between the UK and the EU past the 21-month (or more) transition period.
The Transition Period
The Withdrawal Agreement provides for a transition (EU language) or implementation (UK language) period running from 29 March 2018 until 31 December 2020, which can be extended until the end of 2021 or 2022 by a single decision of the joint committee formed of representatives from the UK and the EU (to be taken before 1 July 2020) (the Transition Period). While no longer a member state of the European Union, the UK will nevertheless be considered as part of the customs union and the Single Market. EU law and jurisdiction will continue to apply to the UK during the Transition Period.
Financial services during the Transition Period
During the Transition Period, it will be in principle "business as usual" for UK and EU financial services firms and activities.
UK firms will continue to be able to provide services in other EU member states via the passports currently available (e.g. management and marketing of investment funds, investment advice, portfolio management) and vice-versa. UK-based financial market participants shall, in return, comply with the legally binding EU legislation, including the technical standards issued by the ESMA, EBA, EIOPA (the European Supervisory Authorities), including an obligation to submit ongoing, clear and detailed reports to confirm that they comply with their guidelines and recommendations.
In addition, the UK will need to ensure full application and implementation of EU legislation (directly applicable regulations, directives and secondary implementing legislation) adopted until the last day of the Transition Period. Moreover, during this time, EU legislation applicable in the UK should be interpreted and applied in accordance with the same methods and general principles as those applicable within the EU (e.g. free movement of capital, freedom of establishment or to provide services, etc.).
Financial services after the Transition Period
The end of the Transition Period is likely to bring significant disruption to the cross-border provision of financial services between the UK and the EU, due to the highly fragmented legal framework concerning the access of financial services firms established in non-EU countries to EU markets and customers. On 31 December 2020 (or at the end of the extended Transition Period), the UK will become a "third country" for the purpose of financial services and the UK-based firms will in principle lose their access to the Single Market that they currently enjoy via financial services passports. The same applies for EU firms, which will lose their passport and ability to freely provide these services in the UK. This means that UK firms will no longer be able to freely provide services on a cross-border basis in EU member states, nor be allowed to freely establish branches therein, and vice-versa.
However, the Political Declaration aims to foster a close relationship on services and investment, including financial services, between the UK and the EU once the Transition Period is over. The UK and the EU undertake to enable free movement of capital between them and to allow the establishment of subsidiaries within their territories, subject however to exemptions (i) to be negotiated should the Political Declaration be translated into legally binding treaties, and (ii) currently applicable to the authorisation of firms providing cross-border financial services.
The Political Declaration seals the UK's and the EU's commitments to:
- preserve financial stability, market integrity, investor protection and fair competition,
- respect the other party's regulatory and decision-making autonomy, and their ability to take equivalence decisions in their own interest,
- observe the other party's ability to adopt or maintain any measure where necessary for prudential reasons,
- engage in close cooperation on regulatory and supervisory matters through international bodies,
- start equivalence assessments of each other's frameworks as soon as possible after the UK's withdrawal from the EU, endeavouring to conclude these assessments before the end of June 2020, and then to keep their respective equivalence frameworks under review, and
- work towards a close and structured cooperation on regulatory and supervisory matters, grounded in the economic partnership and based on the principles of regulatory autonomy, transparency and stability.
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