Agreement reached between the United Kingdom and European Union, but uncertainties remain for Financial Services firms

January 20, 2021

Any financial services firm with clients in Europe please be aware that 2021 is a year of change, but despite Boris Johnson’s Brexit discussions with the President of the European Commission, Ursula Von Der Leyen, over a three course dinner and his “oven ready” Brexit deal, it seems as though the financial services industry was not part of the ingredients.

In summary, the United Kingdom (“UK”) left the European Union (“EU”) on 31 January 2020 when the one year Brexit transition period expired. Until that date, EU law had continued to apply within the UK, but now the end of the transition period has passed, the UK in general is now considered as a ‘third country’ under EU rules.

The treaty agreement (the “Agreement”) between the UK and the EU which governed the ongoing relationship during the U.K.’s exit from the EU, was agreed on 24 December 2020 and was published by the U.K. government on 26 December 2020. However, quite surprisingly given that Financial Services is one of the U.K.’s most significant services industries, this was covered only briefly in the Agreement.

What should asset managers be thinking about now that the UK has left the EU?

Notifications to clients:

The FCA has not instructed firms to communicate with clients about Brexit and the treaty agreement specifically.  However, the FCA has remined firms of the requirement to keep their clients informed about developments which will affect them.  Therefore, FCA authorised firms should have been communicating with clients in respect of any aspects of Brexit which will affect them, as applicable on a client by client basis.

Compliance Documentation reviews:

Firms should currently be reviewing and updating relevant compliance documents to ensure all references to the UK leaving the EU have been inserted into applicable manuals, policies and procedures.

What Is Included for Financial Services?

The Agreement does not contain any special privileges for either party as a result of the similarity between UK and EU financial regulations at the point of Brexit. The treaty includes:

  • A “best endeavours” commitment to implement international standards.
  • A commitment to allow newly established or expanded financial services from the UK into the EU (or vice versa) to take place subject to the same local licensing regime as local firms currently have in place. This comes alongside a commitment for authorisation to be provided within a reasonable timeframe.
  • UK and EU self-regulatory organisations, which are defined to include exchanges and clearing houses, are required to admit financial services suppliers from the UK and EU on a non-discriminatory and “most favoured nation” basis.
  • Access to UK and EU payment and clearing systems operated by public entities has been continued.
  • Transfers of data from the EU (and the three additional EEA member states Norway, Iceland and Liechtenstein, upon their express acceptance) to the UK shall not be treated as a transfer of data outside of the EU. This arrangement will exist for four months, extendable by a further two months unless either party objects to such an extension.

What has not been included for Financial Services?

  • The current branch and services passporting arrangements, which allow U.K. regulated firms access to EU markets, and vice versa, have ceased.
  • There is no provision in the Agreement that guarantees the free movement or right of UK financial institutions to provide services in the European Economic Area (“EEA”), either via establishment of a branch in the EEA or on a cross-border services basis.
  • There is no extension of the current “transitional period” for financial services.
  • The obligations on the parties to review their legal framework and work together on non-conforming measures do not apply to financial services.
  • The obligations on both parties for service industries, for example to facilitate licensing processes and provide a single regulatory interface for UK to EU access, do not apply to financial services.

The above is notwithstanding unilateral initiatives from the UK that provide short-term continuity of access to such institutions, such as the FCA’s Temporary Permissions Regime (“TPA”).

Rishi Sunak, the UK’s Chancellor of the Exchequer, cited an aim to set up agreements on the basis of “equivalence” and establishment of a Memorandum of Understanding (“MOU”) between the UK and the EU in the coming months; measures aimed to facilitate access to the EU marketplace for UK financial institutions. “Equivalence”, in this context, refers to an agreement between the two jurisdictions with different regulatory frameworks, but where the frameworks are deemed substantially similar and robust, thereby enabling a financial institution in one jurisdiction to provide services into another jurisdiction via the “equivalence” agreement.

What are the next steps now the UK has left the EU?

Treasury minister John Glen is set to lead post-Brexit talks with the EU early in January 2021 in order to establish a MOU that will guide future regulatory cooperation on financial services. The aim is to reach an agreement by March 2021 for “equivalence” allowing the finance industry to trade across UK / EU border.

How Effecta Can Help

  • Provide your firm with updates on the progress of implementing an equivalence regime within financial services.
  • Review the impact of Brexit and the current Treaty Agreement on your firm.
  • Review notifications to your clients and update compliance documentation in line with the latest information available.
  • Provide a UK regulatory health check to ensure you are complying with current regulatory requirements in anticipation of any regulatory equivalence being granted.