On September 21, 2017, the EU-Canada Comprehensive Economic and Trade Agreement (CETA) will go into provisional application. After ten years of negotiations, all 1598 pages of the CETA agreement – save for about 15 Articles and an equal number of Paragraphs spread across 30 Chapters – will go into immediate force and effect. Included in this provisional application will be Chapter 13 on Financial Services and the related Schedules. Once in effect, all the rights benefits and protections concerning the cross border trade in financial services between Canada and the EU will be governed by CETA, including any trade involving the UK. After the UK withdraws from the EU on March 29, 2019, the benefits of CETA will be lost between Canada and the UK, but the protections and advantages CETA provides Canadian firms trading financial services into the EU’s single market will remain.
In 2014, Canada exported $1.45 B in financial services to the UK, and only $875 M to the EU. Starting on September 21, Canadian based firms can expand their business in the UK while focussing more on increasing their trade in financial services to the EU. Canadian firms will be able to take advantage of the certainty CETA provides while other firms, including those in the UK will continue to struggle to cope (see Brexit and Financial Services: Waiting for Agreement). Once the UK withdraws from the EU, Canadian firms can continue to sell financial services into the EU’s single market much less concerned about the implications of Brexit.
CETA does not come close to providing the same benefits as those available to a financial firm established within the EU’s single market. However, it does offer a greater degree of legal and regulatory certainty than any other agreement currently or likely to be in place to address the fallout from Brexit.
The most significant advantage in CETA are those rules governing the cross border sale of financial services into the EU’s single market. CETA required the EU and the Member States to state at the outset which financial services can be sold into the single market and which ones cannot. For any new financial services that a Canadian firm wishes to sell into the EU, and that falls outside the prescribed list, market access is assured provided the same financial service is already being sold within the EU or the new service on offer is approved by an EU regulator. It is not a complete negative listing approach that covers other services under CETA. But it does permit innovation and can be constantly adjusted based on developments in both markets.
CETA’s second advantage is the contribution it can make in deciding on whether or not to establish a subsidiary, branch or agency in the EU post-Brexit. Under the EU’s Financial Passporting regime, the cost for accessing the EU from the UK was minimal, even if it meant setting up a branch in a particular Member State to serve a particular category of clients. Once the UK leaves the EU, those firms established in the UK who have come to rely on a Passport for Branch into specific Member States will have to decide if the business case exists to formally establish a new branch, subsidiary or agency in the EU’s single market.
Under normal circumstances, this business case for relocation would be equal to any firm wishing to do so, regardless of where they are originating from. Even CETA confers only a marginal advantage to this decision. But these are no longer “normal circumstances.” Brexit has triggered a significant amount of attention by EU regulators on UK based firms. A series of recent opinions issued by both the European Insurance and Occupational Authority (EIOPA) and European Securities and Markets Authority (ESMA) are specifically designed address the relocation of UK firms into the EU as a result of Brexit. Their primary purpose is to prevent UK firms from relocating into the EU through “letterbox” companies or by other means that will lower the potential for regulatory scrutiny. It is possible that the enforcement of these opinions could capture Canadian firms looking to relocate. If so, these Canadian firms could call on the Market Access, National Treatment and Most Favoured Nation protections under CETA to ensure a fair assessment of their relocation applications.
An additional advantage from CETA is the ability to influence and shape the design of EU financial regulations post-Brexit. Article 13.11 sets out the requirement that all new regulations are published so those with an interest can become “acquainted with them.” There is a notice and comment feature for any particular measures that may be adopted by the EU that could affect Canadian interests. Administrative decisions have to be rendered within a reasonable period of time. A Financial Services Committee is established to carry out an ongoing dialogue on the regulation of the financial services sectors in both the EU and Canada. And if the EU adopts a regulatory measure adverse to a Canadian financial firm, Canada can call upon CETA’s dispute settlement chapter, including binding arbitration, to have the measure suspended.
To those accustomed to operating within the EU’s single market, these protections may not sound like much. However, the ability to be informed of – and have some input into – the design of financial regulations will become increasingly important as the implications of Brexit on the EU’s capital markets takes hold. EIOPA and ESMA largely came into being after the financial crisis of 2009. These and other EU regulators are looking to take on more powers and influence over the shape of the EU’s post-Brexit financial landscape. Canada’s seat at the EU’s regulatory table, however limited, will be of increasing importance and relevance, as will its ability to hold the EU to account for measures that are inconsistent with the aim and purpose of CETA.
The ability to sell financial services into the EU, clear rules governing establishment and market access, a seat at the EU’s regulatory table, and a unique dispute settlement mechanism are all clear advantages accruing to Canadian financial firms under CETA. Provisional application could not come at a better time.