The short answer is – yes, it is – temporarily at least. Beyond March 2021, it remains to be seen. This article looks at what the current arrangement is between the UK and the EU for financial services suppliers now that the UK no longer holds a financial services passport, and what the future of the relationship is for this sector.
What is passporting?
The ‘passporting’ system is the foundation of the EU single market for financial services. It allows a financial services company registered in an EEA State to trade in any other EEA State without needing any further authorisation in that State (or minimal authorisation only), therefore facilitating the free movement of financial products and services in the EU single market. This ability to passport services/products into another State operates only on the basis that the EU’s regulatory regimes for financial services have been adopted by each EEA/EU Member State so that there is a single, shared regulatory standard (the EU Single Rulebook).
EEA States include all EU Member States, Norway, Iceland and Lichtenstein. Non-EEA States do not benefit from the passporting system; access to the EU single market has to be negotiated on a case-by-case basis (e.g. Switzerland has negotiated access to certain parts of the EU single market on the basis that it adopts the same or equivalent standard regulations for financial services, however this access is far more limited than that enjoyed by States that are party to the passporting system.)
What is the current post-Brexit position for a UK financial services supplier (FSS)?
The UK is now no longer an EU/EEA State as it left the EU on 31 January 2020. A transition period ran from that date until 31 December 2020, during which the passporting arrangement remained in place for UK FSSs. This has now ended and the UK’s current relationship with the EU is governed by the treaty entered into by both parties on 24 December 2020. The primary treaty document is the Trade and Co-operation Agreement (the “Agreement”). The Agreement does not contain any arrangement to replace the passporting system for financial services or any extension of the transition period. A UK FSS therefore no longer enjoys the right to passport into EU states and to set up establishments or provide cross-border services (and vice versa). The relationship between the UK and EU is now a relationship between the EU and a third country, with UK FSSs needing to comply with the requirements of each relevant individual Member State, except for any unilateral equivalency decisions. To date such equivalency decisions have been few and far between.
Temporary Equivalency Decisions
The following two temporary equivalency measures are in place (arising from implementation decisions of the EU Commission on 1 September and 25 November 2020 respectively) in respect of services which are vital to the financial stability in the EU market:
- Clearing: the clearing of euro derivatives through UK central clearing counterparties (CCPs). This equivalency period shall expire after 18 months and therefore on 30 June 2022. During this period it is intended that the EU will scale down its heavy reliance on UK CCPs. To date, efforts have been made by Eurex, a Frankfurt-based clearing house, to encourage banks and fund managers to move their euro business to it. Paris, Amsterdam and Dublin are also possible locations for transfer.
- Irish securities: the continued use of UK central security depositories (CSDs) to provide essential recording and maintenance of Irish securities for 6 months, (until 30 June 2021) until they are all migrated from the CREST system to Euroclear Bank.
Does the Agreement commit to any equivalency decisions being made?
Certain declarations are included in the Agreement which deal with the remaining issues to be negotiated by the UK/EU. In respect of financial services, there is a commitment included that a Memorandum of Understanding will be agreed between the parties by March 2021, which will establish a framework for the regulatory cooperation on financial services. The parties will consider:
- bilateral exchanges of views and analysis relating to regulatory initiatives;
- transparency and appropriate dialogue in the process regarding equivalence decisions; and
- enhanced cooperation and coordination1.
The declaration states that the parties will “discuss…how to move forward with equivalency determinations” (emphasis added) meaning that there is no commitment that such determinations will be made, but a commitment to discuss them only.
The concept of ‘enhanced cooperation’ referred to at point 3 above will also be discussed which suggests that the Memorandum could go beyond an equivalence determination in respect of the existing regulatory framework, resulting in a higher level of coordination in the future in respect of new laws and processes. Again however, there is no commitment that any enhanced cooperation will be agreed, and so there is no assurance that the framework that is to be established under the Memorandum will lead to an arrangement that is any different than the current arrangement.
What is included in the Agreement regarding financial services?
Article 5.37 of the Agreement (at page 121) deals with some brief points on financial services as follows:-
- Regulation: there is a commitment for the UK and EU to use their best endeavours to ensure that standards of regulation and supervision in respect of AML and terrorist financing and tax evasion/avoidance are implemented and applied. Reference is made specifically to certain internationally agreed standards which will continue to be applied in the UK2.
- Financial service suppliers new to the territory: it is stated that it will be permitted for either an EU or UK FSS that is newly established in the other territory to supply financial services that FSSs of that territory are already supplying. This is only on the basis that the supply of such services by the new FSS does not require that any new law is adopted or that an existing law is amended. This means that that FSSs new to the territory can apply to be licensed and authorised to operate and it is set out that such authorisation should be provided in a reasonable time.
- Observance of Self-Regulatory Organisations: it is set out that FSSs will be required to observe the rules of self-regulatory organisations, if it is required that the EU/UK be a member of such an organisation in order for a FSS of the other territory to supply such services in its territory.
- Clearing and Payment Systems: Both the UK and the EU shall grant to a FSS from the other territory, established in its territory, access to public payment and clearing systems.
- Prudential Carve-out: there is a prudential carve-out so that each of the UK and EU can apply measures for prudential reasons – meaning that certain measures can be adopted for “the protection of investors, depositors, policyholders or persons to whom a fiduciary duty is owed by a financial service supplier; or ensuring the integrity and stability of [the EU’s/UK’s] financial system." 3
However, the Agreement is to be reviewed every 5 years and therefore the above may be subject to change. Each party can also terminate the Agreement with 12 months’ notice.
The passporting system has not been replaced under the Agreement and only some niche points on financial services are dealt with. No further equivalency determinations are included in the Agreement, beyond the two previously agreed equivalence decisions that are temporarily in place. It has been agreed that a Memorandum of Understanding will be established by March 2021 which will set out the framework for the future regulatory cooperation for financial services. However, the Memorandum sets no deadline for the necessary arrangements to be put in place and contains no commitment to agree to any equivalency decisions, let alone any form of enhanced equivalence. Therefore, for now, it seems it is a hard Brexit for UK FSSs (with no subsidiary within the EU single market).
At present it is not clear whether this will change post-March 2021, however we will publish further updates as they become available. If you have any queries in relation to passporting or on any of the issues raised above, you can contact Michael Hanley firstname.lastname@example.org, Catherine Jane O’Rourke email@example.com or any member of the Banking and Financial Services Team.
2 the G20; the Financial Stability Board; the Basel Committee on Banking Supervision, including its “Core Principle for Effective Banking Supervision”; the International Association of Insurance Supervisors, including the “Insurance Core Principles”; the International Organisation of Securities Commissions, including the “Objective and Principles of Securities Regulation”; the Financial Action Task Force; and the Global Forum on Transparency and Exchange of Information for Tax Purposes of the Organisation for Economic Cooperation and Development.
3 pdf (europa.eu) p.124Back to Full News
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About the Authors
Michael is Head of the Banking and Financial Services team at Hayes solicitors. He advises on a broad range of domestic and cross border finance transactions. His primary focus is acting for lending institutions and borrowers on leveraged/acquisition, commercial property, construction/development and SME finance transactions.
Catherine Jane O'Rourke
Catherine Jane O’Rourke is a Solicitor on the Banking and Financial Services team at Hayes Solicitors. Catherine acts for a variety of Irish and international companies, lending institutions/direct lenders and state bodies and her main area of focus is on transactional banking including acquisition finance, property investment finance and development/construction finance.