UK Government sets out post-Brexit financial services plan

The UK Government published a White Paper (the "Paper") on its proposal about the future relationship between the UK and the EU on 12 July. The White Paper is available HERE.

In the Paper the UK Government sets out its vision for a new economic partnership that includes new economic and regulatory arrangements for financial services, preserving the mutual benefits of integrated markets and protecting financial stability while respecting the right of the UK and the EU to control access to their own markets - noting that these arrangements will not replicate the EU's passporting regimes.

The section in the Paper which addresses financial services specifically is just 14 paragraphs.

In paragraph 60 the UK Government states that it recognises the need for a new and fair balance of rights and responsibilities but acknowledges that the UK can no longer operate under the EU’s “passporting” regime, as this is intrinsic to the Single Market of which it will no longer be a member.

In paragraph 61 the Paper states that given the importance of financial services to financial stability, both the UK and the EU will wish to maintain autonomy of decision-making and the ability to legislate for their own interests. It goes on to say however, that a coordinated approach leading to compatible regulation is also essential for promoting financial stability and avoiding regulatory arbitrage.

Cutting to the heart of the matter, paragraph 62 of the Paper acknowledges that the EU's existing third country equivalence regimes are not sufficient to deal with a third country whose financial markets are as deeply interconnected with the EU’s as those of the UK are.

In the Paper the UK Government sets out the issues as it sees them with the current regime.

In particular, the existing EU equivalence regimes do not provide for:

a. institutional dialogue, meaning there is no bilateral mechanism for the EU and the third country to discuss changes to their rules on financial services in order to maximise the chance of maintaining compatible rules, and to minimise the risks of regulatory arbitrage or threats to financial stability;

b. a mediated solution where equivalence is threatened by a divergence of rules or supervisory practices;

c. sufficient tools for reciprocal supervisory cooperation, information sharing, crisis procedures, or the supervision of cross-border financial market infrastructure;

d. some services, where clients in the UK and the EU currently benefit from integrated markets and cross-border business models. This would lead to unnecessary fragmentation of markets and increased costs to consumers and businesses; or

e. phased adjustments and careful management of the impacts of change, so that businesses face a predictable environment.

Therefore in paragraph 63 the UK proposes a new economic and regulatory arrangement with the EU in financial services.

• This proposal would maintain the economic benefits of cross-border provision of the most important international financial services traded between the UK and the EU – while preserving regulatory and supervisory cooperation, and maintaining financial stability, market integrity and consumer protection.
• This new arrangement would be based on the principle of autonomy for each party over decisions regarding access to its market, with a bilateral framework of treaty-based commitments to underpin the operation of the relationship, ensure transparency and stability, and promote cooperation.
• As part of this, the existing autonomous frameworks for equivalence would need to be expanded, to reflect the fact that equivalence as it exists today is not sufficient in scope for the breadth of the interconnectedness of UK-EU financial services provision.
• As the UK and the EU start from a position of identical rules and entwined supervisory frameworks, the UK proposes that there should be reciprocal recognition of equivalence under all existing third country regimes, taking effect at the end of the implementation period.
• Although future determinations of equivalence would be an autonomous matter for each party, the new arrangement should include provisions through the bilateral arrangement for:

a. common principles for the governance of the relationship;

b. extensive supervisory cooperation and regulatory dialogue; and

c. predictable, transparent and robust processes.

The Paper also proposes that the UK and the EU would set out a shared intention to avoid adopting regulations that produce divergent outcomes in relation to cross-border financial services. To reflect this, the UK-EU arrangement should include common objectives, such as maintaining economic relations of broad scope, preserving regulatory compatibility, and supporting collaboration – bilaterally and in multilateral fora – to manage shared interests such as financial stability and the prevention of regulatory arbitrage.

Supervisory cooperation and regulatory dialogue

In paragraph 69 the Paper also proposes that the UK and the EU would commit to an overall framework that supports extensive collaboration and dialogue.

a. Regulatory dialogue: for equivalence to be maintained over the long term, the UK and the EU should be able to understand and comment on each other’s proposals at an early stage through a structured consultative process of dialogue at political and technical level, while respecting the autonomy of each side’s legislative process and decision-making.

b. Supervisory cooperation: in a close economic relationship between the UK and the EU financial services sectors, it would be necessary to ensure close supervisory cooperation in relation to firms which pose a systemic risk and/or that provide significant cross-border services on the basis of equivalence.

Predictable, transparent and robust processes

In paragraph 70 the Paper proposes that in order to give business the certainty necessary to plan and invest, transparent processes would be needed to ensure the relationship is stable, reliable and enduring. The UK envisages that some of these processes would be bilaterally agreed and treaty-based; others would be achieved through the autonomous measures of the parties.

a. Transparent assessment methodology: the process for assessing equivalence should be based on clear and common objectives; make use of consultation with industry and other stakeholders; and include the possibility of using expert panels.

b. Structured withdrawal process: if circumstances arise that cause either party to wish to withdraw equivalence, there should be an initial period of consultation on possible solutions to maintain equivalence. Either party may also indicate to the other that it no longer seeks equivalence in a certain area. There should then be clear timelines and notice periods, which are appropriate for the scale of the change before it takes effect. There should also be a safeguard for acquired rights to avoid risks to financial stability, market integrity or consumer protection from sudden changes to the regulatory environment.

c. Long-term stabilisation: in accordance with WTO principles, there should be a presumption against unilateral changes that narrow the terms of existing market access regimes, other than in exceptional circumstances. This would mean each side trying to avoid future changes that assess equivalence in entirely new ways that could destabilise an established relationship. Existing equivalence decisions should only lapse after a new decision has been taken.

Dispute Resolution

Finally, where disputes arise between the UK and the EU on the binding treaty-based commitments, the Paper proposes new institutional arrangements which should apply.

However these arrangements should reflect that the UK will no longer be a member of the EU. The Paper states that these new institutional arrangements should respect the UK’s sovereignty and the EU’s autonomy, and be sufficiently rigorous such that people across the UK and its wider family, and across the EU and its Member States can depend on them.

So what does all this mean for Financial Services Firms in the UK and the EU?

At this stage this is just a proposal which will be subject to negotiations which are likely to run for a number of years.

The more immediate concern for the EU is negotiating and agreeing the remaining elements of the Withdrawal Agreement before the October 18th European Council meeting. Given the current status of these negotiations and the remaining elements yet to be agreed firms should continue to plan for the worst case scenario (a dis-orderly Brexit on March 29, 2019 without a transition period).