On August 2, Sam Woods, Deputy Governor of the Bank of England and CEO of the Prudential Regulation Authority (PRA) indicated in a letter to Nicky Morgan, Chair of the Treasury Committee in the UK House of Commons that the greatest impact to financial stability that could arise from the UK withdrawal is “one in which there is no agreement that provides for some form of ongoing cross-border market access between the UK and the EU at the point of exit and no period of transition to this new period.” Woods went on to state in his letter that the PRA was in the process of reviewing 401 submissions from UK and European Economic Area (EEA) banks, insurers and investment firms that operate in both the UK and the rest of the EU. These firms were asked in April to provide “contingency planning for a scenario in which there is no agreement at the point of exit and no implementation period.” Deputy Governor Woods was updating the Chair of the Treasury Committee on the steps the PRA , and by extension the Bank of England, are taking to prepare for the failure by both the UK and the EU to arrive at an agreement on financial services prior to March 29, 2019.

Based on what has been reported to date, the prospects of arriving at such an agreement remain remote. The EU has stated clearly that it will not discuss the future relationship between the UK and the EU until there has been sufficient progress on the amount the UK shall continue to contribute to the EU’s budget, the status of EU and UK citizenship rights are confirmed, and customs, border and movement of peoples issues are addressed between Ireland and Northern Ireland. And even if those issues are resolved, and substantial progress has been achieved, the EU negotiator Michel Barnier still needs to secure a mandate from all 27 Heads of Government from the remaining EU Member States before entering into any negotiations concerning services. With 20 months to go before the UK leaves, and so many other issues to be addressed and resolved, not only is an agreement on financial services remote, it is increasingly unlikely.

This heightened level of uncertainty has made it extremely difficult for financial firms established in the UK to plan for life post-Brexit. The comments by Deputy Governor Woods and the hour by hour press coverage of the Withdrawal Negotiations has only added to this uncertainty. What is being sought is certainty as to the legal framework under which the cross border trade in financial services can and will be conducted between the UK and the EU post-Brexit. The desire is for a negotiated agreement that will be concluded in time so regulators, investors and the financial firms affected by Brexit can know what to do and when to do it. Deputy Governor Woods believes that only a negotiated agreement will suffice. And for most financial firms in the UK, that is the only outcome that will provide them with the certainty they need to know how to proceed.

However, financial firms in the UK need not wait for an agreement that may never come before deciding on how best to preserve “some form of ongoing cross border market access” into the EU’s single market. The WTO General Agreement on Trade in Services (GATS) is an agreement to which both the UK and the EU will be bound immediately once the UK’s withdrawal from the EU is complete. In addition to the GATS agreement, the GATS Annex on Financial Services (Annex) and the EU’s GATS Schedule of Commitments on Financial Services (EU Schedule) are both essential documents that should be used as part of any assessment. The Annex sets out the rules that govern the treatment of the services being sold by one contracting party into the market of the other, while the EU Schedule indicates in what form those services can be sold inside a particular Member State. The EU’s Schedule also confirms that if a service provider establishes a presence in one Member State that firm can provide services across the EU, subject to satisfying the domestic regulations of the Member Sate in which it first establishes itself.

Indeed, it is this acknowledgement by the WTO of the EU’s single market right of establishment which prompted most non-EU financial firms to set up shop in the UK. Because of the commitments made in the EU Schedule, any third country firm that was properly established in the UK automatically gained the ability to sell financial services across the EU through Financial Passporting, both for Service and Branch. Once the UK leaves the EU, this commitments remains. The decision then becomes whether it makes sense for a third country firm established in the UK looking to carry on business post-Brexit to do so. If they do, then both the Most Favoured Nation and National Treatment protections under the EU’s Schedule provide a degree of legal certainty on how such a firm should be treated by the EU once they do. And if they are not treated fairly, then the WTO dispute resolution procedures could be invoked by the third country firm’s home country to make sure that they are.

Clearly, a formal agreement between the EU and the UK on financial services would be in the best interests of both parties. However, the success or failure of these negotiations is not something UK financial firms are in a position to predict. Rather than plan for an outcome that may never occur, it would appear wise to plan for an outcome that will. If in doing so there turns out to be sufficient movement on the part of both sides towards a negotiated agreement then all that planning can be put to good use in trying to influence the final form such an agreement may take. Rather than wait for an agreement that may never come, plan for an agreement that will.