Uncertainty continues for UK financial services firms
Financial services was a sector not provided for in the trade agreement and, despite a Memorandum of Understanding on financial services being agreed back in March (which included a framework for voluntary regulatory cooperation), there are many issues to be resolved. Of primary concern, is the lack of progress on the granting of equivalence.
In the absence of any formalised agreement, the only current way in which UK firms can provide financial services in the EU (or on a remote basis to clients based in the EU) is through a declaration of “equivalence” under a number of existing EU directives. This is where the European Commission determines that the third country’s (here, the UK’s) financial regulatory regime is of an equivalent standard to that of the EU. Brexit however brought about EU changes to the procedures for entering into the regime which has lead to a significant degree uncertainty as to what qualifies as equivalence. Furthermore, the EU has the power to withdraw any equivalence determinations on 30 days’ notice, giving little comfort or security to providers of services.
As a result of the uncertainty, some member states have offered temporary equivalence status to UK and other so called “third country” firms (that is, firms with a head office or registered office outside of the EU) in order to permit them to continue providing services to clients on a cross-border basis. Countries leading this initiative include Sweden, Germany and Luxembourg.
Looking forward, legislation is to come into effect, in the form of MiFID II (Markets in Financial Instruments Directive) which will allow third countries (such as the UK) to register with the European Securities and Markets Authority (“ESMA”), permitting providers to supply services in the EU. Once in effect, this will essentially give third-country firms the benefit of an EU-wide passport to access EU professional clients. This process has been heavily delayed and the EU has not provided any detailed guidance on when it can be expected to take effect from.
Although MiFID II appears to provide greater legal certainty for firms willing to undergo the ESMA registration process, it comes at the cost of complex registration requirements, something that for firms that provide smaller scale services in the EU may be uneconomical. Moreover, there is no guarantee for firms that once authority to provide services in the EU is given that it will last forever, especially as it is likely that the EU will reserve its right to revisit its decisions on a regular basis.
For the time being at least it appears that it will unfortunately remains a case of “watch this space” and waiting for future details to be provided by the EU regarding how in practice the provision of cross-border financial services are to be authorised and regulated.