Brexit: UK and EU-27 reach draft agreement
15 November 2018
On 14 November a draft withdrawal agreement and political declaration on future relations between the UK and EU was published.
As expected the withdrawal agreement includes a transitional period which will run until at least the end of 2020. During this period financial services firms will continue to have access to the single market and the UK will be obliged to apply EU financial services legislation, but have no say on its development. The withdrawal agreement also contains an option to extend the transitional period. The implications from extending the transitional period beyond 2020 could be significant for financial services firms from a regulatory perspective, as the scope for new regulatory requirements to come into force over which the UK has had no say will be significantly increased.
Although the future declaration refers to financial services it does not provide significant detail. The declaration includes commitments by both the UK and EU-27 to preserving financial stability, market integrity, investor protection and fair competition. The declaration also commits to future regulatory and supervisory cooperation, but stresses that regulatory decision making, particularly over equivalence judgements, will be taken autonomously by both parties and that additional regulatory measures can be applied for prudential reasons (the so called prudential carve out included in many Free Trade Agreements).
There may be further negotiations on future arrangements for financial services after March 2019 but at this stage, the declaration suggests that market access will be based on the EU’s current approach to equivalence (rather than a form of enhanced equivalence proposed by the UK). However, the commitment to close and structured regulatory and supervisory cooperation is particularly welcome. If a more comprehensive cooperation approach is agreed, for example through MOUs, this will improve the efficiency of cross-border supervision and business. We understand the European Supervisory Authorities and regulators in the UK have been exploring MOUs, which are expected to be agreed prior to the UK leaving the EU.
The only specific commitment included in the declaration is that both the UK and EU-27 will aim to finalise equivalence decisions by June 2020, which provides a helpful milestone for transition planning. Importantly though the declaration does not commit the EU to extending or amending its current equivalence framework. This means that at this stage equivalence decisions which provide market access to the EU will be limited to areas where an existing market access equivalence regime already exists in EU law (e.g. EMIR and MiFID). In key areas such as banking and insurance there is no commitment by the EU to allow market access based on equivalence decisions and concerns around the predictability of the EU's approach to equivalence (for example the ability of decisions to be revoked at short notice or taken on political grounds) are not addressed in the declaration. This means financial services firms need to continue to plan on the basis that the UK will be treated in the same way as other third countries post-Brexit.
Look out for our upcoming November regulatory update where we will summarise the other recent important Brexit developments.
