Suspense over EU-UK financial services future continues
From 1 January 2021, the UK has ceased to be part of the European Union, losing its rights and obligations as an EU member state, and the Union and the UK will be two separate regulatory and legal spaces. The draft EU-UK Trade and Cooperation Agreement covers financial services in the same way as it is covered in the EU’s other free trade agreements with third countries.
John Bruton, former Irish Taoiseach (prime minister) and a board member of CEPS, a Brussels-based think tank on EU affairs, termed the agreement as “an exercise in damage control”. In an article published on CEPS, Bruton underlined that as far as trade between the EU and the UK is concerned, the common rules (made and interpreted in common) applied as a part of the bloc, will be replaced by understandings, through the Agreement. Though the Agreement will have legal force, it will only be enforceable under the procedures set out in the agreement. “Matters currently resolved in national courts under EU law will have to be settled by political agreement in one of the myriads of committees set up under the Agreement. This is inherently more cumbersome,” wrote Bruton.
The EU-UK Trade and Cooperation Agreement saw both sides agreeing to discuss financial services separately, during the negotiations. It commits both parties to maintain their markets open for operators from the other party seeking to supply services through establishment, ensuring internationally agreed standards in the financial services sector. The two parties will also aim to agree by March 2021, a Memorandum of Understanding (MoU), establishing framework for regulatory cooperation on financial services.
Arved Kolle, associate director, Brexit, Association for financial markets in Europe (AFME), said that while the agreement itself does not provide much for financial services, it is important for the broader relationship between the EU and the UK. “Now that the EU-UK agreement has been finalised, it is important that the EU and the UK put in place outstanding equivalence decisions to ensure a smooth adaptation to the new relationship. This is particularly important in the areas of trading shares and derivatives,” he added.
Kolle stated that the joint declaration on regulatory cooperation is a positive side that there is willingness on both sides to open a dialogue around the future direction of regulation and equivalence. “We hope that progress can be made quickly on the MoU on financial services. As well as facilitating a dialogue, we welcome the reference to providing for transparency and dialogue in the equivalence process, which should provide for greater stability for market participants and their clients,” said the associate director.
The agreement does not include any elements pertaining to equivalence frameworks for financial services, which it deems are unilateral decisions of each party and not subject to negotiation. The European Commission has assessed UK’s replies to its equivalence questionnaires in 28 areas, seeking further clarifications, especially regarding how the UK will diverge from EU frameworks after 31 December, how it will use its supervisory discretion regarding EU firms and how the UK’s temporary regimes will affect EU firms. Due to these assessments, no decisions has been taken to finalise UK’s equivalence in 28 areas. While the Commission has noted UK’s equivalence decisions announced in November in UK’s interests, EU will similarly consider equivalence when they are in the bloc’s interest, according to the agreement.
Kolle said that AFME welcomed the equivalence decisions put in place in 2020 for clearing and settlement, stressing that further equivalence decisions should be made at the earliest. “Financial services firms and regulators had been preparing for different Brexit scenarios for several years. Going forward, we hope that the EU and the UK establish a cooperative and stable long-term relationship for financial services. This should minimise fragmentation as much as possible to enable companies, investors, pension funds, public bodies and all users of financial markets to finance growth and manage their risk as efficiently as possible,” said Kolle.
Meanwhile, the European securities and markets authority (ESMA), the EU securities’ regulator, has withdrawn the registrations of UK-based credit rating agencies (CRAs). This includes AM Best Europe-Rating Services, DBRS Ratings, Fitch Ratings, Fitch Ratings CIS, Moody’s Investors Service and the Economist Intelligence Unit. ESMA’s decision follows the end of the transition period of the UK’s withdrawal from the EU, based on CRA Regulation and the European Market Infrastructure Regulation (EMIR), as well as the Regulation on transparency of securities financing transactions and of reuse (SFTR). This is because it no longer meets the condition under which it was registered, including being a legal person established in the EU. The ratings issued by these CRA cannot be used for regulatory purposes in the EU unless endorsed by an EU CRA – a step that all the above agencies (except the Economic Intelligence Unit) have taken.
Similarly, ESMA has also withdrawn the registration of four UK-based trade repositories (TRs): DTCC Derivatives Repository Plc; UnaVista Limited; CME Trade Repository Ltd; and ICE Trade Vault Europe Ltd. The withdrawal means that EU derivatives and securities financing transactions subject to the reporting obligation under EMIR and SFTR can no longer be reported to the above TRs but only to an EU-established TR.
Building on the agreement's foundations
On the UK side, Chris Cummings, CEO of the Investment Association, believes the provisions contained with the UK-EU Trade and Cooperation Agreement “lay the necessary foundations for a future relationship in financial services,” but that “it is critical that both sides now work towards fulfilling the promise of positive equivalence determinations in the coming months as contained in the Joint Declaration.” He added this will help avoid further unnecessary fragmentation in European capital markets and ensure the industry can continue to deliver for its clients across the continent.
His view echoes that of Bob Wigley, executive chair of UK Finance, for whom concluding these negotiations with an agreement “brings much-needed certainty for businesses and paves the way for the beginning of a new relationship with the European Union.”
“Looking ahead, it will be important to build on the foundations of this trade deal by strengthening arrangements for future trade in financial services. This can be achieved by building on the longstanding regulatory dialogue and supervisory cooperation between UK and EU authorities and reaching agreements on all appropriate equivalence determinations as soon as possible,” Wigley commented.