Time running out for clarity on EU/UK finserv relations

The delay in a clarifying critical elements of relationships between financial services market participants in Europe and the UK may be detrimental to stability according to lawyers, consultants and those in the market.

“If we are waiting too long for a solution, it may be that the market evolves in the meantime, and the benefits of that deal are not as strong as they would have been had a deal been struck at an earlier stage,” said Alastair Holt, a partner in the financial regulation group at Linklaters.

The Brexit trade deal, published on December 28, 2020, does not cover financial market access in great detail. Participants are now waiting for a memorandum of understanding, expected to be published in March this year, for additional guidance.

“[The trade deal] provides a framework for the UK and EU to co-operate in relation to financial services, and envisages that equivalence determinations may be granted by each party in favour of the other, whilst maintaining the autonomy of each party (the UK and EU) to make its own rules and decisions,” said Holt.

The dust is still settling on how things will look short term, according to some.

“We are now operating in a new reality in which the UK is not part of the EU Single Market and UK-based firms have lost their ability to provide certain services from the UK to counterparties and clients based in the EU,” said David Strachan, head of Deloitte’s EMEA Centre for Regulatory Strategy.

“This activity has migrated from the UK and will in future be transacted from within the EU. All the large UK-based financial services firms have established or expanded their subsidiaries in the EU to facilitate this.”

In September, EY estimated firms had transferred £1.2trn worth of assets from the UK to the European Union ahead of Brexit since 2016.

Dean Turner, chief Eurozone & UK economist at UBS global wealth, says the delay could give firms less incentive to operate in the UK but he is not worried about this affecting the size of the UK’s financial market.

“The longer there is a delay in granting equivalence, the less incentive there is to firms operating in the UK because once business has shifted, it’s very hard to pull it back.”

“It’s unquestionable that the amount of business that was previously done in London with regards to the EU will fall. In terms of the magnitude, I find it hard to say that anytime within the next number of years that London will be toppled from its position as Europe’s largest financial centre,” he said.

Questions around whether the EU will grant the UK equivalence status remain, but a bearish sentiment pervades the idea of a widespread agreement.

“The ball is now primarily in the EU’s court on the issue of whether the EU will grant the UK with ‘equivalent’ status,” said Holt.

UBS’ Turner says the EU will “cherry pick” the areas it chooses to grant equivalence, but it will be on a “very piecemeal and limited basis”.

Deloitte’s Strachan is less optimistic.

“Given the EU’s objective of bringing financial market activity previously conducted in the UK into EU markets, we do not expect the EU to be quick to grant any more equivalences.”