The week in outline:

In his speech on Friday (see Document 1 below), Donald Tusk repeated the offer of a ‘Canada+++’ treaty with the UK. This was widely reported in the UK press in the context of the debate at the Conservative Party conference about alternatives to the Chequers/White Paper proposals. Tusk said nothing specifically about financial services (FS). ‘Canada+++’ would represent a very different approach in the goods sector but the less ambitious ‘dual regulation coordination’ (DRC) proposals for FS in Chequers could presumably operate under either model.

There were two speeches from EU FS regulators (see Documents 2 and 3 below) touching on two key aspects of EU Brexit policy which we have considered in previous updates –

  • the EU’s development of its third country arrangements in FS to take account of Brexit. These arrangements are to be the basis for DRC[1] under EU and UK proposals for the future relationship/agreed deal when the UK leaves the single market at the end of the transitional period on 31/12/20. They would also be the basis if there was ‘no-deal’, although in that case, there could be a considerable delay after exit on 29/3/19 before EU equivalence decisions for the UK are in place.
  • the lack of legislative/regulatory measures on the EU side for a ‘no-deal’ scenario, particularly the absence of transitional relief (in contrast to the extensive transitional relief for EU/EEA firms which the UK is implementing under section 8 of the European Union Withdrawal Act 2018 (EUWA).

There are a number of different policy objectives and potential outcomes in the first of these areas. As we explained in our April 2017 report, the EU’s current equivalence measures are patchy across FS sectors/lines of business. Some of the debate in the UK has overstated the extent to which these measures provide market access for third country firms. A European Commission Staff Working Document described third country equivalence decisions thus – “Equivalence decisions in a few areas may enhance the possibilities of doing business in the EU (e.g. investment firms under MiFID II), but the equivalence as such primarily serves prudential regulatory purposes” (e.g. to provide a less burdensome capital treatment for EU financial institutions’ exposures to an equivalent third county) and “is a tool to reduce overlaps in compliance in the interests of EU markets”. In practice, third country market access remains a somewhat un-harmonised area which largely depends on the perimeter and regulatory rules of individual member states.

The UK White Paper/Chequers plan seeks to persuade the EU to amend its FS legislation to add new equivalence-based measures which give greater breadth of coverage for third country market access rights, on the basis that the UK, as a third country, would be able to take advantage of this extended sectoral coverage (given that it will at the outset maintain the full EU acquis and would therefore satisfy any equivalence requirement). The UK has abandoned its previous objective of securing preferential access for UK firms. Although the White Paper stated that its proposals for services would meet GATS Article V requirements for preferential treatment (and suggested bilateral treaty based structures for cooperation), the UK now accepts it would only be able to take advantage of DRC driven market access where EU legislation made this available to all equivalent third countries (and where equivalence decisions were made by the EU under its autonomous procedures).

The EU has not said anything in its initial response to Chequers about the possibility of extending the coverage of DRC market access. The UK has not given details of the broader sectoral coverage or the extent of DRC access that it is seeking, and it is difficult to assess how far the EU may go. Negotiation of the specific FS arrangements is not expected to start until after Brexit on 29/3/19, so this is some way off. So far the EU has taken a tough line on FS and the UK itself is now seeking more limited DRC driven access in FS. We believe that the EU will also be mindful that any extended DRC coverage will potentially be available to other third countries but the idea of extending DRC in some areas may appeal to the EU. First, it may well see benefits for EU markets, particularly in the immediate period after the UK leaves the Single Market, in extending DRC equivalence based access for wholesale business in additional FS sectors and activities. It may also wish to be in a position to reduce or tighten access conditions in the medium term (for example as cross-integration/dependence decreases over time and the EU becomes less dependent on the City of London). Secondly, the EU would thus take the issue of third county market access away from member states and control it at EU level. Harmonisation in these areas would prevent member states from having differing domestic measures and would preclude competition between states to offer greater access to the UK and special deals between the UK and individual member states. In the speech this week, ESMA has again[2] advocated an additional third country regime for trading venues (in addition to the MiFID II investment services passport/DRC for third country firms).

Other aspects of the EU’s review of third country measures for Brexit are less welcome to the UK. EMIR 2 shows how the EU can decide at will to restrict equivalence-based DRC for third country firms. It is also looking to tighten its equivalence assessments with more granular requirements, where Steven Maijoor welcomed the increased role for ESMA in relation to third countries under the Commission’s ESA proposal[3].

Maijoor said that EU-27 national regulators/the ESAs should enter into MOUs with the UK regulators as part of the no-deal contingency planning. He also advocated transitional provisions under EMIR 2.2 for UK CCP access (which would presumably match the UK’s temporary recognition regime under section 8 EUWA for EU/EEA CCPs – see our update for the week ending 27 July).The speeches were seen as a welcome recognition by the EU that transitional measures (on the EU side) would be desirable as part of the contingency planning for a ‘no-deal’ scenario. We believe it is too early to conclude that the EU will take a more pragmatic and less hard-line approach to help UK firms. There was no reference to a general policy to provide transitional relief on a similar basis to the UK measures.

On both issues above, the speakers were careful to limit their remarks without making any firm or broad policy statements. The specific measures that they proposed are clearly driven by concerns within EU-27 markets. On 5th October the Financial Times reported that the EU would shortly announce its no-deal legislation and that this was expected to maintain its hard line on FS. On that basis, the EU would not be expected to offer (at this stage) an equivalent (for UK firms) to the broad temporary permissions regime which the UK is adopting for EEA firms (see our update of the week ending 27 July 2018).