Finances are the Topic of this Divorce: UK and EU agree a Post-Brexit Financial Services Deal

April 29, 2021


3 min read

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What's going on here?

The UK and the EU have come to an agreement concerning the regulation of the financial services industry. It is their first step since Brexit to cooperate on the touchy subject.

What does this mean?

The two sides have agreed on the terms of a memorandum of understanding (MoU) on financial services. However, steps are still required for the formal validation process. The European Commission expects to complete the finish touches imminently.

The memorandum sets out a framework for regulatory cooperation and a joint forum for discussing rules and procedures. It also provides for the sharing of information. According to a Commission spokesperson, the forum will serve as a “platform to facilitate dialogue”. This is distinct from any “equivalence” decision – rulings that each side can make that offer market access to their financial services. Therefore, the memorandum does little to improve the City of London’s access to European financial markets. But it is hoped that the forum will become an important stepping stone to equivalence.

What's the big picture effect?

Since Brexit took effect at the start of 2021, London-based financial firms have been largely unable to operate in Europe. This impediment has forced banks (think JP Morgan and Goldman Sachs) to move out of the City (see our article on that here). According to Reuters, in January 2021, more than €6bn in daily share trading left London for Amsterdam, along with boatloads of derivatives trading; further evidence of the repercussions that Brexit has had on the market. The continued difficulties faced in London are partly a result of the December trade agreement. The agreement neglected the finance sector: fewer than four pages out of 1,250 related to financial services. The prioritisation of other issues during those negotiations is threatening the status of London as a global financial hub. To add salt to the wound, the EU has revealed it is in no rush to grant an equivalence ruling that would restore the sector’s trading rights.

The verdict on the memorandum is split. Some believe that it could change things – by helping financial firms in the City eventually win back some access to the single market. That scenario would depend on whether the UK can use the new forum to build better relations with the EU. Conversely, many view the new agreement as the UK entangling itself in EU bureaucracy. James Pearcy-Caldwell (Chief Executive at Aisa Group) argues that any limited future access to the single market gained for bureaucracy is not a good trade. EU bureaucracy restricts innovation. Similar to the vaccine roll-out, it is riddled with protectionism – making it less competitive globally. 

Moreover, the EU could have given equivalence on day one of Brexit becoming effective. The bloc has the power to rescind an equivalence ruling any time within 30 days. Therefore, the risk of the UK deregulating its financial market after receiving an equivalence ruling would not have been that significant. If the UK decided to diverge from the EU’s rules, the bloc could have turned to rescission. By deciding against this, the chances of the UK ever having the same level of access to the single market are slim. On day one, the two sides’ regulatory regimes were still identical. However, they grow further apart with each passing day – illustrated by the UK’s new capital market reforms (see an article on that here).

Regardless of which side of the debate, there is a consensus on what the UK should do next. It would be unwise for the UK to sit on its laurels, waiting for equivalence. The best course of action would be to make the City more attractive to international investors (relative to the fast-growing US and Asian markets). Ultimately, Brexit does not remove the UK’s existing advantages of scale, legal process, tech, genuine protections, time zone and interconnectivity. The loss of equivalence stings, but this could be an opportunity to strengthen its position on the world stage in financial services.

Report written by Deniyi Coker

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