Brexit – Any real developments for a financial services trade deal?

In the last month we have witnessed speeches from both the Prime Minister and the Chancellor of the Exchequer detailing the Government's objectives in respect of the UK's future economic partnership with the EU.

The expiry of the negotiation period which has followed the triggering of Article 50 is fast approaching and the heightening, seemingly irrepressible, Brexit-related noise is showing no sign of abating. As a result, it remains challenging for businesses operating in the financial services sector to react positively in the absence of any real detail on how the Government's proposals will be enacted.

The Government's position

The content of Theresa May's keynote Brexit speech at Mansion House on 2 March 2018 would not have come as a surprise to many, principally because it could not be said to contain anything that was truly new. Rather, the Prime Minister sought to outline the key points of negotiation and the high level objectives for the UK going forwards.

That being said, the speech did mark a shift in tone whereby the complexity of the issues posed by Brexit was explicitly acknowledged, with more detail offered on the deal sought for the benefit of the financial services sector. May reiterated that the UK would not be seeking to be part of the Single Market or a Customs Union. Instead May intended to focus on establishing access to the EU's market based on a mutual recognition agreement, which in her view, would ensure regulatory alignment.

The idea of mutual recognition was expanded on by the Chancellor of the Exchequer, Philip Hammond in his speech a few days later. Hammond championed the value of UK financial services to the EU. He emphasised the inadequacy of the EU's equivalence regimes (which permit cross-border trade with non-EU countries in some sectors) for the UK going forward. Hammond's position was that if the UK were to agree an equivalence model, it would be left as an automatic rule-taker and in a position where access to the market could be removed at any time.

Both the Prime Minister and the Chancellor of the Exchequer confirmed beyond doubt that, following the UK's departure from the EU, the UK financial services sector will not benefit from passporting rights. These currently allow UK financial institutions to provide services across the EU. Rather, the Government envisions the UK being party to a comprehensive and bespoke free trade agreement that deals with financial services.

What would a free trade deal look like?

The key to any agreement appears to be mutual recognition. Under this concept the UK and the EU would, although bound by separate regulations, accept that these regulations were sufficiently comparable to enable uninhibited access to each other's markets. A mechanism to maintain regulatory alignment and resolve any disputes would have to form part of any agreement.

It is unclear exactly what this mechanism might look like. However, from the words of the Prime Minister and the Chancellor of the Exchequer, we can infer that the key facets of such an arrangement would include:

  • a structured regulatory dialogue between the UK and the EU. Presumably this means that should the UK wish to amend its legislation in an area where regulatory alignment is required as a condition for market access, it would be required to check the acceptability of such legislation with the EU before doing so;
  • an independent arbitration mechanism for dispute resolution; and
  • detailed arrangements to enable data protection and data flows between the UK and EU.

The European Council's proposed framework

On 7 March, President of the European Council, Donald Tusk, held a press conference in Luxembourg at which he presented the draft framework for the EU's post-Brexit relationship with the UK which is scheduled to be adopted by the European Council. Encouragingly, the guidelines do acknowledge a free trade agreement as the favoured model for the future economic relationship between the EU and UK and Tusk was keen to emphasise that the European Council did not want to build a wall between the EU and the UK. The guidelines envisage trade in services will be included in any free trade agreement.

However, the guidelines as currently drafted anticipate that any deal on services would incorporate a high degree of freedom of movement between UK and EU citizens. This outcome would seem unacceptable to the UK Government given the strong emphasis placed to date in public dialogue on the UK regaining control over its borders.

Many in the financial services sector have viewed the guidelines in a positive light. They appear, at least in part, to subscribe to many of the Government's financial services objectives and set a realistic marker for the commencement of negotiations.

However, until further details emerge, their potential impact on Brexit as a whole should be viewed with caution. Tusk himself, in presenting the guidelines, stated:

"I fully understand and respect Theresa May’s political objective to demonstrate at any price that Brexit could be a success and was the right choice. But sorry, it is not our objective."

Clearly, painstaking negotiation will be required.

Conclusion

The coming months will be crucial as more flesh is added to the regulatory bone. The UK and EU have both made a commitment to reach an agreement on a transition arrangement and it is hoped that the future relationship will be settled by October this year.

If you would like more information on this topic, please contact Jonathan Kitchin, Partner in Michelmores' Finance & Investment team.

This article is for general information only and does not, and is not intended to, amount to legal advice and should not be relied upon as such. If you have any questions relating to your particular circumstances, you should seek independent legal advice.