Financial services

What does the Trade Agreement say?

The FTA has very little to say about the cross-border provision of financial services (FS). Market access arrangements for FS are instead based on equivalence decisions – taken unilaterally by the UK and EU. The EU Commission has not announced any further regulatory equivalence decisions at this time, with continued uncertainty particularly in relation to the trading obligations for shares and for derivatives.

The FS provisions that are included in the FTA include access to payment and clearing systems operated by public entities and a prudential carve-out (which enables the UK and EU to adopt measures for prudential reasons). FS is insulated from retaliation in the event of a dispute in other areas of the agreement, however this will not prevent the EU from revoking or amending equivalence decisions. The FTA does not allow for Most Favoured Nation treatment on FS unlike elsewhere. Both parties also agreed a joint declaration to establish a framework for regulatory cooperation, allowing for transparency and dialogue in the process of adopting, suspending or withdrawing equivalence decisions. The UK and EU will agree a Memorandum of Understanding by March 2021 to establish the framework for this cooperation.

How does this compare to what was expected?

As expected – and broadly consistent with precedents - the FS provisions are very limited. They reflect the areas of broad alignment between the draft UK and EU texts published earlier in 2020 but fall short of the greater ambition which the UK sought in some areas.

While the joint declaration on regulatory cooperation lays the foundations for a more stable equivalence process, establishing the framework will require further negotiation. The UK wanted this to be settled in the FTA itself, as is the case in the EU-Japan FTA. This will be important in providing a predictable environment for UK-EU trade in FS and ensuring a close ongoing regulatory dialogue.

What are the actions for business?

FS firms have spent over four years preparing to ensure continued access to UK/EU markets post-Brexit. These firms now need to assess the broader FTA impact, including in areas such as mobility of workforce. While FS do not feature prominently in the FTA, the fact there is one is positive for the business environment in which the FS sector operates and its customers. Failure to agree an FTA would have been very disruptive to certain businesses, in some cases affecting their creditworthiness, at a time when many businesses are already struggling due to the COVID-19 pandemic. These challenges have been reduced, though firms will now be eager to see further positive equivalence decisions adopted as swiftly as possible.

By building on the foundations the FTA provides, it should also enable constructive progress on other areas which have been held back through negotiations, such as equivalence assessments, data adequacy and regulatory and supervisory cooperation. This will only help strengthen future cross-border trade in FS, with benefits for consumers and businesses.

To discuss specific support with your Brexit preparations based on this latest development contact: Deloitte Brexit Insights.