Markets appear, according to commentators, to be pricing in a last-minute deal between the European Union and the United Kingdom. This would certainly fit various other scenarios we have seen with last-minute eleventh-hour deals involving the EU. Notwithstanding this, various preparations are under way for the event of a no deal with Belgium, France and the Netherlands; the three countries most immediately impacted, recently requesting the European Commission to step up contingency planning for a no deal. In the UK, planning for a no deal has been underway for some time. Regardless if there is a deal or not the financial services sector is likely to be the least affected as they are not likely to be included in a deal and thus other arrangements will be in play regardless.
Certainly the “mood” music from the UK authorities support this. In a joint letter sent from the Bank of England/Prudential Regulation Authority and the FCA, it was stated that the Financial Policy Committee had recently noted that most risks for a no deal have been mitigated for the Financial Services sector in respect of cross-border provision. This is a reflection of the extensive preparations made by both the authorities and the private sector over the last few years for the eventuality that the transition period could end without an EU and UK agreement on equivalence or other arrangements.
The Temporary Permissions Regime (TPR) and the use of temporary transitional powers ensure that continued access to the EU for UK financial institutions remain in place after 2020. Indeed, affected UK firms have developed strategies and either ramped up EU entities, or established them, so that clients can be onboarded as they are built out. Financial Institutions continue to engage with clients and some variation has been noted between UK firms and those incorporated subsidiaries and branches of overseas firms. The joint letter notes that in this instance “disruption to financial services, particularly to EU-based clients, could arise”.
The ECB and ESMA have been similarly active in asking EU firms to prepare for the 1st of January 2021 although anecdotal evidence suggests that the preparations lag behind those in the UK with regard to financial services. The EU has concentrated a lot on the ability of UK firms to do or not do business in the EU with the ECB’s expectations being firmly along these lines when they stated that “all activities related to European products or European customers should, as a general principle, be managed and controlled from entities located in the EU.” However, London is one of the world’s leading financial centres, with no European alternative able to match it for either efficiency or cost-effectiveness. Many European businesses rely on the UK to fulfil their financial requirements. Going beyond the end of 2020, it will be interesting to see who blinks first, however depriving European corporations from access to UK capital markets would be a heavy price to pay.
In this regard, the attitude to equivalence shows how a post-Brexit Europe could look. After all, the UK will still be part of Europe just not part of the European Union. The UK Chancellor of the Exchequer in a recent speech outlined the City of London’s future post Brexit. The UK has decided to act unilaterally in making “a set of equivalence decisions for EU and EEA member states” providing stability for EU financial services firms operating in the UK. This approach will be welcomed by EU firms operating in the City of London, but it also showed London will be open for increased business internationally as the Chancellor announced that he was “publishing today a detailed framework for our approach to equivalence more generally” and that the UK “will use equivalence when it’s in the UK’s economic interest to do so.”
One area which will be of great interest following Brexit will be that the Bank of England will be free to implement a new regime for smaller banks that would have been impossible while a member of the EU. Deputy Governor of the BoE, Sam Woods, announced the measure stating “let’s have high standards here in London and here in the UK, but let’s get back to a more British way of doing that regulation…….. things that can be tough but less bureaucratic”. This is in keeping with the inherent differences between the EU and the UK in which the EU is heavily rules-bound, but the UK has traditionally favoured principle-led regulation which leads to a more proportionate approach.
So, it would appear that whatever the outcome of the current talks, financial services are well placed to cope with the new reality. Some uncertainty still exists with regard to derivatives trading but here we can expect the EU to be more pragmatic than they have shown to be in certain other key areas. Given the UK’s role in shaping European regulation over the years, and with the current regulations enshrined in UK law, it is to be hoped that the EU grants equivalence to UK financial services in the way the UK has unilaterally declared equivalence the other way round. It is hard to be optimistic on this point given the EU’s stance that it would have to be in the “EU’s interests”. Those close to the talks have commented that the UK is happy to be Europe’s financial services destination of choice and the ball, with regard to financial services, is currently in the EU’s court. Let’s see what is served up next!