While we were assured for months that it was oven-ready, the UK-EU trade deal was finally agreed on Christmas eve. But unfortunately for the UK’s financial services sector, the new trade deal doesn’t offer anything especially nourishing or tasteful. While the deal that has been agreed facilitates EU-UK trade in goods with zero tariffs and zero quotas, the deal does not make any provision for services, and in particular the trading of financial services.
As a consequence, UK-based financial services firms have now lost access to the EU – a market valued at approximately €33.2 billion. Critically, UK-based firms have lost the so-called passporting rights which allowed them to freely trade across the bloc. The only hope for such firms of returning to a pre-Brexit level of access to the EU will be if EU the grants regulatory equivalence (or some alternative) to the UK’s financial services sector.
In anticipation of the worst effects of Brexit, many UK financial services firms made applications for authorisation to the Central Bank of Ireland. As a result, December was a particularly busy time for decision committees within the Central Bank. Other financial services centres such as Frankfurt, Paris and Amsterdam also benefitted from job creation opportunities that came about as a result of UK firms seeking to migrate at least part of their operations.
Naturally, the UK will want to restore a strong level of EU access for its financial services sector. Both sides will now begin in earnest to reach agreement around the mechanics of regulatory equivalence or some alternative, and have set March 2021 as a deadline by which they hope to conclude a memorandum of understanding. But even in circumstances where agreement is reached, regulatory equivalence will not necessarily endure. The fact that equivalence can be withdrawn at one month’s notice means that equivalence can evaporate very quickly. Concerned by this, and driven by a desire to secure a more sustainable and stable approach, the UK will be seeking to persuade the EU to grant access to the financial services sector on the basis of outcomes-based rules rather than on more traditional equivalence of rules basis.
In addition to being an important part of the UK economy (exports in 2019 of £79 billion and employing over 1m people), the financial services sector in the UK has also been an important player in the growth and development of the financial services sector in Ireland. It is in Ireland’s interest that the City of London and the wider financial services sector in the UK can continue to thrive. But that’s not necessarily an objective that will be shared by the EU negotiators. The newly appointed EU Commissioner with responsibility for Financial Services – Mairead McGuinness – is on record as stating that the EU must not allow itself to be “captured by a system that we don’t regulate” and that the EU must not allow itself to be controlled by it.
While the Central Bank of Ireland has for many many months been applying pressure on firms in Ireland to make preparations for Brexit, it has recently issued a statement urging financial services firms in Ireland that use services of UK-based service providers to contact those UK firms so as to confirm whether they have obtained all necessary authorisations to allow them to continue to provide services to Irish customers following Brexit.
In Ireland, other Brexit-related preparatory measures have included the establishment of a third country branch regime in 2018. More recently we have seen the introduction of a Temporary Run-Off Regime for certain insurers and insurance intermediaries. Provided for under the European Union (Consequential Provisions) Act 2020, the new run-off regime seeks to protect consumers of insurance products by ensuring that existing policies administered in Ireland by UK insurers and insurance intermediaries who satisfy the conditions of the regime can continue for up to 15 years from 31 December 2020.
While getting Brexit done and taking back control have served as useful 3-word adages, needless to say these memorable phrases bear no relation to the scale of the challenge that the UK now faces to restore a decent level of access to the tantalisingly vast single market in financial services that its has just left. It is likely that the UK relationship with the EU will never truly be “done” and will instead take the form of an endless series of arduous negotiations and bi-lateral treaties with a Union which dwarfs its negotiating power. So, it seems that there is still some distance to go on that long and winding road …