Brexit – What’s the FS deal?

The Times newspaper reported this morning (1 November) that “Theresa May seals Brexit deal on financial services”, a story that moved currency markets, signalling that the UK government may have reached agreement about how Britain’s most significant export industry will trade with the EU in the future. The announcement caught most careful observers of the Brexit negotiations by surprise.

Sadly, it would appear that there remains much to be done.  UK financial services firms can NOT assume “they will be able to operate as they do now in Europe”, as the report suggests.

UK and EU negotiators have been working on the text of what will be a “political statement” about the nature of future trade arrangements.  This political statement, when it is agreed, will sit alongside the legal texts of the UK’s Withdrawal Agreement from the EU, and the Transitional Arrangements that will govern the EU-UK relationship between the Brexit date (29 March 2019) and the end of December 2020.  It is intended to guide the detailed negotiations of a trade treaty between the UK and EU, which both sides will aim to conclude during that Transition Period.

There has been a lot of public debate about the potential trade arrangements for “Goods”, and whether a customs union should be sought.  By contrast, trade in “Services”, including Financial Services, has received much less attention.  Today’s Times story suggests that “British and European negotiators have reached tentative agreement on all aspects of a future partnership on services, as well as the exchange of data.”  This is itself significant for many services industries, suggesting that so long as UK regulations do not diverge significantly from the EU’s, that market access will remain largely unchanged.  Further, where industry regulations begin to diverge, the report suggests agreement that “neither side will unilaterally deny market access without first going through independent arbitration and providing a notice period”.

But regulatory "equivalence" for financial services has a much more specific and limited meaning. It does not mean that existing passporting arrangements - by which financial firms located in any Member State can offer their services across the Union’s Single Market without further local regulatory oversight - will be available to UK based firms.  Indeed, in its July Chequers proposals, the UK Cabinet agreed as much, stating that UK firms “can no longer operate under the EU’s 'passporting' regime, as this is intrinsic to the Single Market of which [the UK] will no longer be a member”.  So future EU market access from the UK will be limited to services where there are existing provisions for third country firms within the governing EU legislation - and there are many of FS service areas where EU equivalence provisions don't exist.

The Chequers proposal details a UK ambition to enhance the EU's equivalence arrangements – for example to ensure longer notice periods for decisions which either side may take to extinguish equivalence decisions - to reflect the especially large and deep EU-UK financial relationship.  The UK also wants to ensure regulatory authorities will share information to assess and guard against financial stability risks.  But there is no suggestion that current access arrangements for firms would be replicated.  For more on the UK’s ambitions for enhanced FS equivalence arrangements, see our recent PwC blog devoted to this topic

So while the announcements of political progress on overall services trade is positive news for the FS industry – especially if there is to be agreement for continuity of data sharing between EU and UK entities – there should be no confusion that this signals UK-based firms may be able to operate as though current passporting rights will continue.

Andrew Gray

Andrew Gray | Partner and Head of Brexit
Profile | Email | +44 (0)7753 928 494

Brian Polk | Director for EU regulatory developments
Profile | Email | +44 (0)20 7804 8020

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