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Brexit and financial services – a round up of the current position

On 28 February 2018 the European Commission published its initial draft of the Article 50 Withdrawal Agreement which is expected to form the basis of a treaty that will govern both the withdrawal of the UK from the European Union and the transition period following that withdrawal. The Agreement provided that a transition period would run from the date that the Agreement enters into force until 31 December 2020. During that transition period, EU law would continue to apply, and the UK would be subject to the jurisdiction of the European Court of Justice. On 19 March, the UK and EU Commission negotiating teams announced political agreement as regards a transition period and citizenship, amongst other key items but were silent on the position as regards Northern Ireland. At an EU Council summit on 23 March 2018, the EU27 leaders endorsed the 21-month transition period between March 2019 and the end of 2020 and adopted the negotiating guidelines on the future EU-UK relationship.

Article 50 Withdrawal Agreement – Transitional arrangements


The terms of the transition agreement would mean that the UK will be treated as if it were (broadly) an EU Member State when it leaves the EU until 31 December 2020. Our bulletin summarises the key terms of the transitional arrangements but the intention is for EU law to continue to apply to the UK during the period and for it to have the same legal effect as it does within Member States. The UK would cease to have voting rights and/or the ability to participate in EU institutions as of March 2019 although it would have some limited rights of consultation in relation to new European legislation.

In relation to financial services, this would mean that firms would continue to benefit from passporting between the UK and EEA during the transitional period. Obligations derived from EU law would continue to apply and firms must continue with implementation plans for EU legislation that is still to come into effect before the end of December 2020. Consumer rights and protections derived from EU law would also continue to apply.

While the EU27 Member States have endorsed the proposals, the terms will not become legally binding until the entire draft Withdrawal Agreement has been finalised and ratified by the European Parliament, the European Council and the UK. Both the UK government and the European Commission negotiators are working towards finalising the terms of the draft Withdrawal Agreement by October 2018 and the process must be completed by 29 March 2019. Accordingly, even if the text is agreed at a political level by October 2018, the process of ratification could take several months, meaning legal certainty is unlikely before the end of 2018.

Regulator reaction

Immediately following the political announcement regarding the terms of the transitional arrangement, the Eurozone’s top financial services supervisors told banks to keep planning for Brexit without any transition arrangements on the basis that the agreed arrangements are not legally binding and may yet be vulnerable to political risk. On 26 March, the ECB published a speech on its supervisory priorities and annual report for 2017 supervisory activities. In relation to Brexit, the ECB stated that “banks wishing to relocate to, or expand activities in, the euro area, and needing authorisation post-Brexit, need to submit applications to the ECB and NCAs by the second quarter of 2018 at the latest”.

In the UK, the Bank of England (BoE) has confirmed that in light of the political agreement on transitional arrangements, it is “reasonable for firms currently carrying on regulated activities in the UK by means of passporting rights, or the EU framework for central counterparties, to plan that they will be able to continue undertaking these activities during the transitional period in much the same way as now.” Given the scale of the authorisation challenge facing the regulators with only a year to go, the BoE has written to impacted firms to make clear that they may plan on the assumption that UK authorisation and recognition will only be needed by the end of the transitional period. Given the political uncertainty that remains in relation to the successful progress of the UK-EU27 negotiations and the likelihood that the Article 50 withdrawal agreement may not be ratified prior to March 2019, it is helpful to note that the BoE refers to the Government’s commitment to bring forward legislation to create a temporary permission regime (thereby minimising the potential for any cliff-edge at Brexit) and confirms that that would be used as the backstop should one be needed.

Hot on the heels of the BoE announcement, the FCA confirmed that firms and funds would continue to benefit from passporting between the UK and EEA during the transitional period and that in light of HM Government’s commitment to providing for a temporary permission regime as a backstop, firms and funds would not need to apply for authorisation at this stage. Subject to the Government’s legislation setting up the temporary permissions regime, the FCA’s expectation is that firms and funds that will be solo­regulated by the FCA will need to notify the FCA of their desire to benefit from the regime. Notification will not require submission of an application for authorisation and the FCA will set out further details on these proposals later in the year. On 9 March 2018, the FCA launched a survey to collect information from EEA firms and funds who would like to participate in the regime and the FCA has encouraged firms to complete this.

Practical comment

Whilst the UK regulators’ announcements are helpful, it is only one side of the story. Given the on-going political uncertainty and the fact that the transitional arrangements are unlikely to be legally binding until the end of 2018, firms have only been provided with certainty as regards the approach of the UK regulators – if political agreement fails to be ratified, the UK authorities will use the temporary permissions regime to maintain the status quo, at least immediately following a “hard” Brexit. The European authorities have not provided this comfort and clearly expect firms to continue with their contingency plans. This may be a developing theme in that the UK authorities and regulators are incentivised to take unilateral steps to ease the impact of Brexit on incoming business whilst their European counterparts approach the issue differently.

The future UK-EU27 trade arrangements – will financial services be included?

As part of the March summit, the EU Council adopted a new set of guidelines with a view to opening negotiations on the overall understanding of the framework for the future UK-EU27 relationship. The guidelines provide that the future UK-EU27 relationship should not permit “cherry picking” and should ensure a level playing field. They note that the depth of any partnership with the UK is limited by the UK’s red lines ruling out continued membership of the single market and the customs union, and that this will have a negative economic impact, “in particular in the United Kingdom”.

The guidelines set out the elements that the EU27 would like to see in a future relationship with the UK including:

  • A “balanced, ambitious and wide-ranging” free trade agreement (FTA), which should be finalised and concluded once the UK has left the EU.
  • Co-operation on matters such as environmental issues, movement of persons, socio economic co-operation on issues like transport, research and education, law enforcement and judicial co­operation, co-operation on security, defence and foreign policy, and on data protection.
Robust governance procedures.

The guidelines also state that the FTA will “address trade in services, with the aim of allowing market access to provide services under host state rules, including as regards right of establishment for providers”. Such agreement will be “to an extent consistent with the fact that the UK will become a third country and the Union and the UK will no longer share a common regulatory, supervisory, enforcement and judiciary framework”.

Leading EU figures have maintained that financial services cannot be included in a free trade deal; however, prior to the March EU Council summit, a leaked version of the guidelines was circulated which was reported to include financial services for the first time. Press coverage suggested that in that draft, a new “Annex IV” was included which dealt specifically with financial services and stated that the aim in talks should be market access for UK-based financial firms via “reviewed and improved equivalence mechanisms”. The proposed revisions supposedly stated: “Regarding financial services, the aim should be reviewed and improved equivalence mechanisms, allowing appropriate access to financial services markets, while preserving financial stability, the integrity of the single market and the autonomy of decision making in the European Union. Equivalence mechanisms and decisions remain defined and implemented on a unilateral basis by the European Union” and that the Council “welcomes that the Commission has started to review … equivalence rules” so that these are “appropriate for the situation after the withdrawal of the UK”.

While it has been reported that financial services were discussed at the Summit, the new Annex IV was not included in the final guidelines. On 4 May, the Department for Exiting the European Union and the European Commission jointly published a document setting out the topics for discussion in the negotiations on the framework for the future UK-EU relationship – financial services were specifically referenced.

What form could the UK-EU27 financial services relationship take?

On 7 March 2018, Philip Hammond reiterated that third country equivalence would be wholly inadequate for the scale and complexity of UK-EU financial services trade. He stated that “the principle of mutual recognition and reciprocal regulatory equivalence provided it is objectively assessed, with proper governance structures, dispute resolution mechanisms, and sensible notice periods to market participants clearly could provide an effective basis for such a partnership”. This approach accords with that proposed by Andrew Bailey, Chief Executive of the FCA. Given their limited coverage, particularly in relation to prudential regulation (CRDIV does not provide for a third­country regime), uncertainty of availability and the lack of key safeguards associated with them, the third-country regimes do not provide an acceptable long-term, sustainable solution for the UK­based industry as a whole to access EU markets and vice-versa.

On 6 March, the European Parliament published a 13-page document which set out the Parliament’s priorities for the UK’s exit as set out by the Brexit Steering Group led by Guy Verhofstadt. It proposed an “association agreement” between the EU and the UK pursuant to Article 8 TEU and Article 217 TFEU which could provide an appropriate framework for the future relationship, and secure a consistent governance framework, which should include a robust dispute resolution mechanism, avoiding the inflation of bilateral agreements and the shortcomings which characterise the relationship with Switzerland.

At a Parliament plenary debate in Strasbourg on 13 March 2017, EU chief Brexit negotiator Michel Barnier declared that he “agreed with the structure” being proposed and on 14 March, Parliament approved the text of that resolution. While the European Parliament does not have a formal role in the Brexit negotiations, it will have a binding vote on the eventual deal.

Those wishing to engage with the UK Government or public officials on Brexit should read our article on the applicable rules and potential challenges of doing so – see the UK section of this Risk Note.

Further information

This article is part of the Allen & Overy Legal & Regulatory Risk Note, a quarterly publication.  For more information please contact Karen Birch –, or tel +44 20 3088 3710.

Legal and Regulatory Risk Note