The European Commission has given its consent to the signing of the memorandum of understanding (MoU) between the UK and the EU on regulatory cooperation in financial services, and the text has been published. It is expected to be signed on behalf of the parties shortly. The MoU is concerned with establishing processes and frameworks for discussion, rather than commitments on trade liberalisation. Nevertheless, the fact that the MoU is now about to be signed is a positive sign of improving UK-EU relations in this area, and the processes it provides for should help to reduce the risk of avoidable frictions in the future.
History and context
The signing of the MoU will fulfil a commitment made by the parties in a joint political declaration that accompanied the 2020 UK-EU Trade and Cooperation Agreement (TCA). The original commitment was to sign such an MoU by March 2021, but although the text was agreed at a technical level by that date, it was never signed. The long delay is generally attributed to tensions in other aspects of the relationship, notably the arrangements for Northern Ireland: agreement on the Windsor Framework in February this year has released the blockage.
Arrangements for ongoing cooperation in financial services are normal in recent EU trade agreements, for example those with Japan and Canada. However, unlike those, the UK-EU arrangements have been put in a separate MoU rather than in the text of the trade agreement itself. MoU commitments are not legally binding. The text spells this out: “this [MoU] does not create rights or obligations under international or domestic law”. And it extends the same principle to the substance of the discussions: “[d]iscussions in the Forum will not restrict the ability of either the EU or the UK to implement regulatory, supervisory or other legal measures that either considers appropriate”. This reflects the EU’s general reluctance in the withdrawal negotiations to give binding commitments on financial services, no doubt reflecting a wariness of the UK’s competitive strength in this area.
This MoU will sit alongside other MoUs already entered into between UK and EU regulatory authorities, that deal with ongoing regulatory cooperation on a more granular, regulator-to-regulator, level.
Areas of cooperation
The MoU provides for cooperation in four main areas.
Exchange of views on regulatory developments – The UK and EU will exchange views and analysis relating to regulatory developments and other issues of common interest. This would include promoting timely domestic implementation of international standards (such as the Basel Committee standards for banking). The timely identification of potential cross-border implementation issues is also an aim. Regulatory changes by one party may have problematic implications for the other – whether for investor protection, market fragmentation, financial stability or competition. Transparency and exchanges of views about these developments can enable the other party’s views to be taken into account, avoid them being taken by surprise, and prevent difficulties from arising by accident.
Transparency and dialogue on equivalence decisions – There is to be transparency and appropriate dialogue in the process of adoption, suspension and withdrawal of “equivalence” decisions. This particular type of regulatory decision-making is singled out for special mention, reflecting a specific commitment (no doubt at the UK’s request) made in the 2020 political declaration. Equivalence decisions are a mechanism, in both EU and UK legislation, by which one party can unilaterally recognise the other’s regulatory system as being equivalent to its own in a particular respect, so as to give preferential treatment for a specific purpose. They are a form of regulatory deference.
But equivalence decisions are quite hazardous to rely on as they are seemingly sometimes made on political as well as technical grounds, and can be revoked on short notice. For a period following the Brexit referendum there was a lot of UK interest in trying to make the EU’s equivalence system more stable and predictable in the hope that a more reliable system might be a viable basis for some UK firms to do business in the EU post-Brexit. But the EU had no interest in changing its arrangements here, or in fettering its discretion in any way. These MoU provisions concerning transparency and dialogue are all the UK has to show for its efforts on this subject.
As things have turned out, the EU has made only two equivalence decisions regarding the UK anyway, both related to market infrastructure, both time-limited and both on the grounds of financial stability needs. Equivalence has therefore never really been a possible means of market access for UK firms, so the need to make the way it operates more reliable has lost of a lot of its significance. And UK firms have long since adopted other approaches to doing business in the EU.
The EU has previously said that agreeing this MoU was a necessary step to considering making any further equivalence decisions. The UK will no doubt continue to press the case.
Exchange of views on market developments and financial stability issues – The 2008-9 global financial crisis showed how financial instability originating in one jurisdiction can rapidly cause financial instability in others. Now that the UK is no longer a member of EU-wide fora such as the European Systemic Risk Board, the UK and EU want to have alternative arrangements in place for discussing these issues. Market developments may affect financial stability or pose investor protection concerns, as new products or ways of doing business are developed, and these too will be within the scope of the MoU’s cooperation arrangements.
Cooperation and coordination in international bodies – The TCA itself commits the UK and the EU to using their best endeavours to ensure that internationally agreed standards in the financial services sector for regulation and supervision, for the fight against money laundering and terrorist financing and for the fight against tax evasion and avoidance, are implemented and applied in their territory. The MoU expands on this, envisaging discussions on timely implementation of international standards, discussions on issues of cooperation in multilateral contexts and, where practicable, sharing positions on agenda items prior to key G20 or other international meetings.
The Joint EU-UK Financial Regulatory Forum
A structure for these arrangements will be supplied by a “Joint EU-UK Financial Regulatory Forum”. The Forum will meet at least semi-annually, and more frequently if the parties so wish. The principal participants will be the UK government (in the form of HM Treasury) and the European Commission (in the form of the Directorate-General for Financial Stability, Financial Services and Capital Markets Union), although they may invite others, such as regulators, other departments and EU member state representatives.
Some transparency is envisaged concerning the work of the Forum: “The Participants may release a joint statement after each semi-annual Forum meeting to give visibility to its outcomes. The statement may note progress on relevant topics, where necessary and appropriate.”
This first meeting of the Forum is expected to take place in the second half of this year and is likely to mirror the arrangement that has already existed for some years between the EU and the U.S.