EU and UK keep a door open for cross border provision of Financial Services with new MoU
The Brexit Trade and Cooperation Agreement left out rules for the future of a very crucial business area for both the UK and the EU: financial services. Literally since the Brexit referendum of 23 June 2016 banks and financial services providers, regulators and supervisors both in UK and in the EU started to figure out how their business and regulation would look like after the final Brexit. As this only happened with the ending of the transition period on 31 January 2021, there was quite some time to prepare for solutions, however, the back and forth of the discussions between the UK and the EU, the eroding trust and confidence between the parties during this lengthy process and the still unclear outcome forced many banks and financial service providers to prepare early for the worst case – a hard Brexit for financial services.
UK and many of its big players, who dominated the European financial markets from London which is and for a long time will stay by far the biggest financial center in the EU pressed hard to reach an agreement with the EU Commission to keep market access to the remaining EU countries while at the same time being able to open its own regulation for “international standards” in order to attract more international business from other parts of the world.
The EU to the contrary from the outset made very clear that any business in the remaining EU would need to comply with its EU regulation and that UK players would be treated as any competitor from third countries, which in fact meant that UK market participants would need to open fully EU licensed subsidiaries and move business to places in the EU. While the UK granted EU financial services firms continued market access via a number of temporary regimes, Brussels refused a reciprocal regime fearing that the UK would diverge from EU standards in many aspect, thus endangering the EU investor protection, markets supervision and financial stability standards which it achieved over decades. Therefore, in the end over 500 UK financial players already took the decision to move most of their existing EU business to newly established subsidiaries, mainly in Ireland, Paris, Frankfurt or Amsterdam, with Frankfurt attracting most of the banking business. And it is expected that additional business will be moved over time.
But gladly UK and EU seem to have realized that shutting the door for each other is no solution to overcome the real challenge: that they both need to compete with the much faster growing US and Asian financial markets. Based on that understanding the ongoing talks on how to further structure the relationship regarding financial services now brought to life a Memorandum of Understanding. This does not grant UK the desired market access via equivalence, however, at least keeps the door open for further talks on measures to preserve financial stability, market integrity and investor and consumer protection. Its main purpose is to establish a regulatory dialogue between UK and the EU in the form of the “Joint UK-EU Financial Regulatory Forum” based on the blueprint of the EU-US talks. The Forum will meet at least twice a year based on a variety of preparing working group meetings which follow an agreed working program. This should give the parties the necessary transparency about the other sides intended regulatory changes, reduce uncertainty for market participants and even help to solve cross border issues.
Hopes that it will be a first step to equivalence being granted for specific services may be too high and may be disappointed, especially as UK already pulled out plans to diverge from the regulatory EU standards and refocus its business model on attracting international listings, FinTechs and digital finance.
But in the MoU the UK and the EU promise to cooperate on international fora, notably G20 and IOSCO, and to keep talking, which alone will help to regain trust and confidence in each other and a common understanding of and work on the further development of regulation in a world in which both parties are not the biggest fish in the pond, but still need to fight together to make a living.
Dr Andreas Prechtel
Association of Foreign Banks in Germany/
Verband der Auslandsbanken in Deutschland e.V.