After two years of delays, the EU and UK have signed a memorandum of understanding (MOU) on financial services on June 27. The non-binding joint declaration aims to establish a “constructive, mutually beneficial relationship” following seven years of separation strife after the Brexit vote in 2016.
The MOU is based on the shared objectives of “preserving financial stability, market integrity and the protection of investors and consumers”, according to Mairead McGuinness, EU commissioner for financial services, financial stability and the Capital Markets Union.
As part of the agreement, the Joint EU-UK Financial Regulatory Forum will be created to discuss “voluntary regulatory co-operation” on financial services issues on an ongoing basis. According to the UK government announcement: “Both sides will share information, work together towards meeting joint challenges and coordinate positions where appropriate on issues ahead of G7, G20 and other international meetings.”
The forum will be held at least twice a year and the first meeting is expected to take place later this year.
While the signatories – Ms McGuinness and Jeremy Hunt, UK chancellor of the exchequer – emphasised the potential mutual benefits, they were also both quick to highlight that this MOU is similar to several regulatory co-operation arrangements in place with other jurisdictions, such as the US.
According to Irish legal firm William Fry, the agreement will “not restrict the EU or UK’s ability to independently take regulatory, supervisory or other legal measures that either deems appropriate. Notably, the MOU does not deal with the access of UK-based firms to the Single Market or EU firms’ access to the UK market, nor does it prejudge the adoption of equivalence decisions”. As such, regulatory harmonisation remains unlikely in the near term.
Despite a lack of substantive commitments on how this co-operation will work in practice, many UK market players and organisations see the MOU as a first sign of meaningful progress post-Brexit in relation to financial services regulation.
“This is an important step forward allowing both parties to work together on removing trade frictions and help support a better flow of mutually beneficial cross-border trade with the EU,” said David Postings, chief executive of industry body UK Finance.
However, Etay Katz, finance regulatory partner at law firm Ashurst, takes a more pragmatic stance. “This agreement is a step forward for the UK, although is very limited in what it will deliver in practice for regulated firms,” he said.
“Fundamentally, the EU is competing with the UK for financial business and thus we do not expect any meaningful concessions from the EU other than those dictated by self-interest or systemic considerations,” he continued.
The UK is also pursuing its own interests. Just two days after the EU-UK MOU was signed, the long-awaited UK financial reforms bill became law. According to the UK government, the Financial Services and Markets Act (FSMA) 2023 “seizes the opportunities of Brexit” by tailoring financial services regulation to fit UK markets.
Andrew Griffith, economic secretary to the Treasury, said in a statement: “This landmark piece of legislation gives us control of our financial services rulebook, so it supports UK businesses and consumers and drives growth. By repealing old EU laws set in Brussels it will unlock billions in investment – cash that can unlock innovation and grow the economy.”
The act will pave the way for the implementation of the Edinburgh Reforms package announced in late 2022. It specifically lists more than 250 pieces of retained EU financial services legislation that will be revoked. This has raised concerns in the market that the UK could be headed for a Big Bang 2.0-style deregulation, however others believe that the Edinburgh Reforms are about writing a new chapter in UK financial services.
How does the FSMA fit with the EU-UK MOU? According to law firm Pinsent Masons: “The act’s introduction of a new third-country ‘equivalence’ regime for ‘simple, transparent and standardised’ securitisation represents a significant innovation for the UK’s securitisation regulatory regime, despite the EU having ruled out providing reciprocal equivalence. Although the exact detail of the UK’s regime – to be set out in the final statutory instrument and firm-facing rules – is still to be published, the regulators’ approach to securitisation is expected to utilise the flexibility and adaptability which the FSMA model provides.”
Joy Macknight is editor of The Banker. Follow her on Twitter @joymacknight
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