The UK’s overarching position makes it clear that the Government will not agree to any obligation for its laws to be fully aligned with the EU’s – sovereignty is paramount. The EU’s stance, meanwhile, is to ensure open and fair competition between the two markets, including securing a commitment from the UK to maintain a robust regulatory level playing field.
This note sets out the opening negotiating position around equivalence and market access for financial services (FS) firms, and identifies some differences between the UK and EU’s positions.
Level playing field
The EU is clear that, given the geographic proximity and economic interdependence of the UK and EU, the future partnership with the UK “must ensure open and fair competition, encompassing robust commitments to ensure a level playing field” - the UK and EU’s commitments should prevent unfair competitive advantages to ensure a durable relationship.
The UK’s overarching stance is equally clear, yet quite different – it will not agree to any obligations for its laws to be aligned with the EU’s, or for EU institutions to have jurisdiction in the UK. Notwithstanding this, in relation to FS, the UK’s desired Comprehensive Free Trade Agreement (CFTA) should include “legally binding obligations on market access and fair competition” – in line with precedent in the free trade agreement negotiated with Canada. David Frost’s recent speech1 puts this in context – the UK’s focus is to make UK laws relevant to UK markets. The ability to commit to legally binding obligations to ensure fair competition is not perceived to be in conflict with the UK’s overarching stance.
The prospect of achieving a CFTA including market access provisions for FS firms will be contingent on progress made in the overall trade negotiations; FS firms will be keeping a close eye on this as the negotiations progress. In particular, firms will be keen to see progress made before June 2020, by which time, the UK Government will take stock of how far the negotiations have progressed. If it decides that there is insufficient progress, the Government’s focus will switch to domestic preparations to exit the transition period in an orderly manner.
The EU’s position is to ensure that equivalence mechanisms and decisions remain defined and implemented on a unilateral basis by the EU, with transparency and appropriate consultation with the UK. This is to preserve the EU’s regulatory and supervisory autonomy.
The UK’s position is to carry out unilateral FS equivalence assessments, distinct from the CFTA. The UK’s position emphasises that currently it has the same rules as the EU, and therefore there is a strong basis for concluding comprehensive equivalence assessments before the end of June 2020. The ambition to conclude equivalence assessments before the end of June 2020 was outlined in the non-binding Political Declaration, agreed between the UK and EU in October 2019.
In a bid to remove uncertainty around equivalence assessments, the UK is keen to ensure that there is a structured process for the withdrawal of equivalence findings, with appropriate consultation with the EU, to be agreed as part of the negotiation. However, there is no mention of a structured withdrawal process in the EU position.
The absence of a structured process for withdrawal of equivalence findings between the UK and EU would create uncertainty for firms seeking to rely on any equivalence assessments, particularly as in some cases they can be revoked with only 30 days’ notice. There is precedent for equivalence being effectively withdrawn – in 2019, the European Commission decided not to renew its equivalence decision in relation to Switzerland’s financial market rules and the EU Markets in Financial Instruments Directive and Regulation.
Whilst Michel Barnier, in a speech last week2, recognised that equivalence decisions are, and will remain, unilateral EU decisions, he clarified that EU will not separate equivalence from the broader trade negotiations. This will therefore have implications for the timing of, and uncertainty around, any FS equivalence decisions. However, on balance, we think that both parties will agree on a mechanism to minimise any adverse financial stability impact to both markets from 1 January 2021 onwards.
The UK Government will be seeking to ensure that the CFTA establishes regulatory cooperation arrangements, including appropriate consultation and structured processes for the withdrawal of equivalence findings. The UK envisions that such arrangements should be based on existing frameworks with the EU’s trading partners, with particular reference to the regulatory forums established under the EU-Canada and EU-Japan free trade agreements.
The EU is also committed to cooperation on regulatory and supervisory matters but does not explicitly refer to previous EU agreements with other third countries.
Supervisory cooperation is one of the essential pillars that would facilitate a positive equivalence assessment for both countries. We expect supervisory cooperation agreements to be in place, whatever the outcome of the trade negotiations or the equivalence assessments. These will be necessary for firms to be able to offer cross-border services and establish branch structures, but they will not be sufficient.
Data adequacy assessments
One of the UK’s stated objectives is to have an independent policy on data protection at the end of the transition period. This suggests that while the General Data Protection Regulation will be the starting point, the UK Government may choose to amend or apply a different interpretation to some of its requirements.
However, both parties are committed to maintaining a high level of data protection, and on this basis the UK will still seek an adequacy decision from the EU before the end of 2020 to maintain the free flow of personal data. However, given that multiple UK national regulations interact with GDPR, any changes or court judgements in domestic regulation in one sector may have a cross-sectoral impact on the interpretation of data laws.
The ability to move data freely between the UK and EU27 has a big day-to-day operational impact on firms and therefore FS firms will need to monitor this area closely.
It is clear that, as a starting position, both the UK and EU will seek to agree a CFTA, covering financial services at least in some shape or form. Unilateral equivalence decisions by both parties will be the key instrument used to govern interactions between the UK and the EU in respect of financial services. Compared to Single Market membership, market access is expected to be more limited, and less stable given equivalence decisions can be withdrawn. As negotiations progress, the likely outcomes in relation to FS will become clearer. In the meantime, we expect the UK to finalise the remaining memoranda of understanding (MoUs) on supervisory cooperation with EU member states – MoUs have been agreed with 23 of the 27 member states so far.
1Speech by David Frost, the Prime Minister’s Europe Adviser and Chief Negotiator of Task Force Europe, on “reflections on the revolutions in Europe”, 17 February 2020.
2Speech by Michel Barnier, the European Commission’s Head of Task Force for Relations with the UK, on cooperation in the age of Brexit, 26 February 2020.