Brexit teaser

UK had hoped for a more binding deal, but EU does not want to compromise control of its internal market.

At the end of March, EU and UK officials confirmed that they had agreed the contents for a memorandum of understanding (MoU) on financial services, which should lead to the creation of a Joint UK-EU Financial Regulatory Forum.

The two sides were aiming to have an MoU in place by end March, which will not carry the same status as a treaty or formal agreement. The UK had hoped for a more binding deal, but the EU does not want to compromise control of its internal market for financial services. Nonetheless, the MoU can be viewed as an achievement given the very strained relationship between the two sides over issues such as vaccines and the EU-UK land border in Ireland.

The MoU sets out how the two sides will co-operate on regulatory matters and in itself does not provide more access to EU financial markets for UK located firms.

The MoU does not advance the cause of UK firms being offered access to EU markets on the basis of equivalence

Peter Bevan, Linklaters

Media reports suggest that the two sides will meet twice a year to discuss regulatory matters and that the forum could include discussions on autonomous decisions on equivalence. They will look to work together to reduce uncertainty, identify possible cross-border implementation issues and to tackle regulatory arbitrage.

The co-operation arrangements mirror those the EU has with the US, which are designed to deal with potential inconsistencies.

Equivalence hopes on hold

For some industry professionals, the language in the MoU raises hope that the EU may later grant equivalence for UK financial services beyond the two temporary rulings currently in place.

Nicolas Veron, a senior fellow at the think thanks Bruegel and the Peterson Institute, argues the European Commission is unlikely to grant the UK equivalence any time soon despite the two having almost identical rules as the UK authorities will not commit to regulatory alignment. He said the EU also wants to reduce its extensive reliance on UK financial services.

“In itself, the MoU does not advance the cause of UK firms being offered access to EU markets on the basis of equivalence, and on the other hand neither does it prevent the UK [or the EU] from diverging from current standards,” said Peter Bevan, global head of financial regulations at law firm Linklaters. “But it could be an important step towards a more co-operative relationship.”

Hans Joachim Lefeld, consulting partner at LPA Group, said it is reassuring to see both sides are talking at an operational level.

“It should be seen as an MoU between independent actors, rather than signifying closer future integration. Discussing the means by which information on potential future equivalence decisions might be shared is not the same as actually making them,” warned Rob Moulton, a partner at law firm Latham & Watkins.

Whatever moves the UK makes to be more attractive to financial firms, Mr Veron does not think it will replace the loss of passporting into the EU single market. Overall, he is pessimistic about the City of London’s prospects and doesn’t believe it will again scale its pre-Brexit heights as it adapts to being an offshore European financial centre.

This article first appeared in The Banker’s sister publication Global Risk Regulator.


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