European Union: UK Negotiations: The State Of Play

The negotiations have so far proceeded in phases, with phase one being concluded¹. It is expected that the transitional arrangements for Brexit will be formalized at a summit scheduled for 22 – 23 March. This is a pressing concern for the industry as it will give businesses, banks and investors more time to adjust to the post-Brexit environment and for the U.K. to make clear what that environment will look like. It also has the political benefit of bridging the EU's budgetary gap created by the U.K. leaving the EU. It is possible the transitional period will run for longer than 20 months though, as at the time of writing, this looks likely to be the agreed length.

The European Commission has recently published a draft withdrawal agreement for discussion with the Council and the European Parliament's Brexit Steering group². The European Commission has also published a number of recent "Notices to Stakeholders" on the impact of Brexit for various sectors. A raft of financial services-related Notices was released on February 8, 2018³. The Notices pertaining to financial services present a high level summary of the potential impact of the loss of the financial services passports. These Notices, while carefully drafted and largely correct from a technical perspective, focus wholly on a bleak "no-deal" Brexit scenario and concentrate on disclosure and planning issues. A number of questionable sweeping statements are made in these publications concerning the inability of U.K. firms to do business with EU clients after Brexit—given that reverse solicitation laws, EU and national laws concerning place of performance, national regulatory perimeters and contractual continuity provided for under human rights laws are all essentially ignored. However, these publications at least highlight the need for robust contingency planning covering all scenarios.

Phase two of the U.K.-EU negotiations is expected to address the post-Brexit cross-border "access" arrangements. In financial services, this is likely to involve mutual recognition by way of an enhanced version of the EU's existing equivalence regime, broadly replicating the passport but on the basis of equivalent rather than identical rules. In her "Road to Brexit" address in London at the beginning of March, the U.K. Prime Minister Theresa May reiterated that the U.K. Government is aiming for an ambitious and comprehensive new trade relationship with the EU, outside the customs union and without reliance on single market passports. The U.K. has made clear that such a deal must include financial services. In a speech on March 7, 2018⁴ Chancellor of the Exchequer Philip Hammond challenged political assertions that financial services cannot be part of a free trade agreement and put forward arguments demonstrating that such inclusion would not only be possible but would also be of mutual benefit. Mr Hammond also stated that the financial services component of a future U.K.-EU partnership should be based reciprocal regulatory equivalence and close supervisory co-operation. And there should be proportionate and reasonable consequences should the U.K. seek to diverge from regulatory alignment with the EU in the future.

Separately, the European Commission has indicated that at the very least a unilateral declaration of equivalence across a number of areas is on the table. The EU's own briefing papers for Brexit note that the equivalency regime under existing financial services directives should be sufficient to address most questions arising under Brexit⁵. The current different in negotiating position is that the U.K. wishes the gaps in the existing equivalence framework to be filled in and there to be a more formalized, two-way, binding arrangement to ensure predictability, avoiding any relocation costs (which would ultimately be put back on EU27 customers).

Some doomsday pronouncements and market assumptions about a no deal Brexit are overdone, since basic equivalence arrangements are almost certain to be put in place before Brexit. However, it is possible that no Brexit deal is reached on financial services. This has an effect on so-called "access." If an arrangement with the EU or indeed the wider European Economic Area (EEA) ⁶ is not reached, firms will need to navigate the more complex and less-understood means for delivering financial services to EU customers without any overarching framework. There are many such means since the EU is bound by its Treaty to be open for business to the outside world⁷. Further, the EU needs capital flows to continue after Brexit in order to avoid the massive shock to the Eurozone, more expensive financial services and deadening of growth that would be an unavoidable consequence of market fragmentation.

However, a deal would be preferable for the U.K., EU and the global financial markets, so long as it is on enhanced equivalence terms and—in accordance with the existing equivalence concept applied already to the U.S. and other countries—does not seek to render the U.K. a rule-taker. Such an outcome has been rejected not only by the U.K. but also its regulators as being too risky for the global markets. Regulation requires the ability to engage in dynamic regulation and supervision on the ground, close to the markets and in the language of the markets.

Footnotes

1 The U.K. and EU negotiators published a Joint Report on progress made in phase one on December 8, 2017. See https://www.gov.uk/government/publications/joint-report-on-progress-during-phase-1-of-negotiations-under-article-50-teu-on-the-uks-orderly-withdrawal-from-the-eu.

2 Following discussion at EU27 level, the draft withdrawl agreement will be formally transmitted to the U.K. It is available at https://ec.europa.eu/commission/publications/draft-withdrawal-agreement-withdrawal-united-kingdom-great-britain-and-northern-ireland-european-union-and-european-atomic-energy-community_en.

3 The most recent Notices to Stakeholders relate to markets in financial instruments, banking and payment services, post-trade financial services, asset management, credit rating agencies, insurance/reinsurance and statutory audit. They are available at https://ec.europa.eu/info/publications/180208-notices-stakeholders-withdrawal-uk-banking-and-finance_en.

4 See Mr Hammond's speech, available at https://www.gov.uk/government/speeches/chancellors-hsbc-speech-financial-services.

5 See for example the Internal EU27 preparatory discussions on the framework for the future relationship: "Services," published 6 February 2018. Available at: https://ec.europa.eu/commission/publications/slides-services_en.

6 The EEA consists of all of the EU member states, together with Iceland, Liechtenstein and Norway. These additional countries have entered into the EEA Agreement which, among other things, allows them to participate in the EU's single market. Much of the EU single market legislation relating to financial services applies to the EEA, as it has been incorporated into the EEA Agreement. A list of EU legislation with EEA relevance is available at, http://www.efta.int/media/documents/legal-texts/eea/other-legal-documents/list-eu-acquis-marked-or-considered-eea-relevant/weekly_list.pdf. The term EU, where used in this note, includes EEA.

7 See Treaty on European Union, Title V, available at http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.C_.2016.202.01.0001.01.ENG&toc=OJ:C:2016:202:TOC#C_2016202EN.01001301.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.