The U.K.-EU Brexit deal provides no new transition period for financial services, nor any new arrangements to replace the existing “passport.” This leaves both the U.K. and EU to address matters of access in financial services through unilateral declarations of equivalence under existing equivalence regimes contained in U.K. and EU law (as well as any new ones that might be introduced) and through domestic laws. It does however address certain matters ancillary to equivalence, for instance on combatting money laundering and the application of global standards such as the Basel Rules. Unless there is a raft of unilateral equivalence declarations made by the EU before year end (to match those already made in the U.K.), it looks likely that for financial services 1 January will prove to be a “hard” Brexit, requiring implementation of most aspects of firms’ contingency plans.
The long-awaited treaty between the U.K. and EU which will govern their relationship after the completion of the U.K.’s exit from the European Union was agreed on 24 December 2020 and published by the U.K. government on 26 December 2020. The main document is a “Trade and Cooperation Agreement”, 1246 pages in length, together with 26 pages of declarations, and texts on nuclear cooperation and exchanging classified information.
Financial services, despite being one of the U.K.’s most significant industries, is covered only briefly, on pages 107-111 of the Trade and Cooperation Agreement and page 2 of the Declarations. The more general provisions relating to services, and related areas such as business visas, will also be relevant to financial institutions.
It is perhaps easiest to explain the new U.K.-EU regime by reference to what it does not do:
As a result, unless there is an (as yet undeclared) issuance of a swathe of new equivalence determinations, most U.K. and EU firms would be well advised to press ahead with their contingency plans for 1 January.
The new U.K.-EU deal is very much “Canada-style.” It does not contain any special privileges for either party as a result of the similarity of U.K. and EU financial regulations at the point of Brexit. The treaty includes:
The question of which institutions will be in or out of scope of the financial services definition may be important for some sectors. Life and non-life insurance, insurance mediation, deposit-taking, brokerage, investment advice, clearing, settlement and asset management are all clearly in scope of the definition. The definition of banking and investment services is essentially an embellished version of that in the Annex to the fourth Capital Requirements Directive (CRD4). However, no investment instruments are prescribed and there is noteworthy “underlap” between the CRD4 regime and activities defined under other EU regulatory regimes, such as MiFID II and the Payment Services Directive.
There are attempted catch-all provisions for “services auxiliary to insurance, such as consultancy, actuarial, risk assessment and claim settlement services” and also for “advisory, intermediation and other auxiliary financial services on all the activities listed in points (A) to (K), including credit reference and analysis, investment and portfolio research and advice, advice on acquisitions and on corporate restructuring and strategy”. However, exchanges, multilateral trading facilities and specialist payment services firms (other than account information providers, which may fall into a financial data category) would not appear likely to fall under any such auxiliary definition. Moreover, it is unclear whether activities relating to instruments at the edge of financial regulation, such as emission allowances or shorter-dated or physically-settled derivatives, which are or may be regulated under MiFID II or other regimes, are in-scope. Doubtless, opportunities may present themselves over the coming years for payment services firms, emissions dealers, exchanges and MTFs to take the position that they are not in the financial services sector for these purposes and should benefit from the more extensive protections and access rights applicable to other services sectors.
Perhaps the more important measures are described only in high-level in the Declaration and left for the future. This reads as follows (with no more):
“1. The Union and United Kingdom agree to establish structured regulatory cooperation on financial services, with the aim of establishing a durable and stable relationship between autonomous jurisdictions. Based on a shared commitment to preserve financial stability, market integrity, and the protection of investors and consumers, these arrangements will allow for:
- bilateral exchanges of views and analysis relating to regulatory initiatives and other issues of interest;
- transparency and appropriate dialogue in the process of adoption, suspension and withdrawal of equivalence decisions; and
- enhanced cooperation and coordination including in international bodies as appropriate.
2. Both Parties will, by March 2021, agree a Memorandum of Understanding establishing the framework for this cooperation. The Parties will discuss, inter alia, how to move forward on both sides with equivalence determinations between the Union and United Kingdom, without prejudice to the unilateral and autonomous decision-making process of each side.”
As explained in some of our previous client notes, and publications by a partner of this firm, so-called “enhanced equivalence” would provide a sounder basis for the EU and U.K. to work together. This involves essentially: (i) both the U.K. and EU granting “equivalence” to each other under existing regulatory frameworks, recognising the (at present) identical nature of financial services laws in the EU and U.K.; (ii) introducing greater levels of cooperation and coordination around the development of new laws and processes for possible withdrawal of equivalence; and (iii) “filling the gaps” in the equivalence framework, such as for commercial banking and primary insurance.
This commitment in the Declaration could presage such a model (though it does not require such an outcome), but as of now there are no details or timetable for any agreement.
The announced equivalency and temporary recognition framework for market and customer access has been extensive (although some gaps remain) on the U.K. side for EU firm access. However, equivalency determinations have been close-to-non-existent on the EU side for access by U.K. firms, not providing any express cross-border coverage for even major sectors as banking, asset management or investment services. EU equivalence determinations to date cover only a handful of sectors necessary for systemic reasons, such as clearing and depositories. Most of the larger U.K. firms will have established EU subsidiaries to provide service continuity, but other U.K. firms will have to rely on other options, such as the “characteristic performance” test or use of “reverse solicitation” in order to continue to provide services to EU clients. These will be of particular relevance to firms with a smaller customer base, or which will not be ready in their licensing or customer transition plans for 1 January 2021. It remains to be seen whether, in the final days of 2020, there is time for any last-minute equivalency decisions or other temporary relief to be published on the EU side to prevent the need for customer terminations by U.K. firms.
 Articles 2.4(3)(b), 3.5(2)(b).
 Article 1.4.
 Article 5.1(1).
 Article 5.41.
 Article 5.42.
 Article 5.1 et seq.
 Article 5.43, which incorporates by reference articles 2.3 (national treatment), 2.4 (most favoured national treatment), 3.4 (national treatment) and 3.5 (most favoured nation treatment).
 Article 5.39.
 Annex 1, Paragraph 14.
 EU Reservation No. 12 – Financial Services; EU Reservation No. 16 – Financial Services UK Reservation No. 9 – Financial Services.
 Article FINPROV.10A.
 Article 5.38.
 Directive 2013/36/EU.
 Directive 2014/65/EU.
 Directive (EU) 2015/2366.
 See Shearman & Sterling Perspective, “More Pieces of the Brexit Puzzle, Enhanced Equivalence, Transitional Regimes,” 20 August 2018; Shearman & Sterling Perspective, “Enhanced Equivalence in the Context of Brexit,” 23 October 2018; and B. Reynolds, “A Template for Enhanced Equivalence: Creating a Lasting Relationship in Financial Services between the EU and the UK,” Politeia, 17 July 2017.
 Recognition of non-EU financial frameworks (equivalence decisions).