Beyond Brexit: A view from the House of Lords

The House of Lords EU Services Sub-Committee published a report on 24 March, Beyond Brexit: trade in services , examining the future UK-EU relationship on trade in services.

The report considers the future UK-EU relationship on trade in services, including financial services, and follows an inquiry launched by the House of Lords EU Select Committee in January into “the future of UK-EU relations: the institutional framework”.

Significant challenges remain

Whilst recognising that significant challenges remain for trade in services between the EU and the UK, the Committee’s overall conclusion is that it is in both parties’ mutual interest to ensure that services can continue to flow as smoothly as possible. However, the Committee seems to recognise that the process is complicated by the divergent views of the parties.

The Chair of the Committee, Baroness Donaghy, recognised the significant gaps in the current arrangements between the EU and the UK on financial services, stating that “The EU hasn’t granted the UK the bulk of the financial services equivalence decisions required to enable transactions to flow freely. And the two sides are yet to agree on future regulatory cooperation.”

In particular, the Committee notes the absence of substantive financial services terms in the EU-UK Trade and Cooperation Agreement, which it describes as “disappointing, [but] not a surprise”.

Memorandum of understanding

Commenting on the memorandum of understanding on financial services (MoU), which is due to be agreed between the UK and the EU by the end of the month, the Committee says it welcomes the plan for “structured regulatory cooperation in financial services” and hopes it will provide a solid foundation for future relations.

However, it goes on to warn that dialogue will be worth little if it is not based on transparency and trust. It therefore urges the UK Government and regulators “to pursue as deep a level of cooperation, predictability and information sharing as possible” and ensure regular consultation so that the UK financial services sector’s interests and priorities can be represented.

This seems to echo the general view in the markets that whilst the MoU may provide a starting point and a framework for ongoing dialogue, it will not provide any tangible outcomes for investment firms or market participants.

Equivalence

Whilst recognising that the financial services sector was well prepared for 1 January, the Committee notes that “delays to key decisions about the future relationship, particularly on equivalence, mean that financial services remain in a period of uncertainty”. The inability to continue to rely on the passporting regime have necessitated the movement of some activity to the EU and firms facing challenges in navigating different regulatory regimes in each Member State. The Committee is concerned that the lack of mutually agreed arrangements could over time lead to a big shift of people and assets out of the UK.

The Committee appreciates that the UK financial services sector opposes the EU’s line-by-line approach to equivalence and supports an outcomes-based approach. It agrees that equivalence decisions would best meet the needs of both UK and the EU market participants, but recognises that in many areas the EU is “unlikely to grant these without the UK sacrificing more decision-making autonomy than equivalence is worth”. In particular, the Committee regrets that the equivalence decision for UK central counterparties is time-limited and believes a longer-term equivalence decision would better serve the interests of both sides.

Overall approach

As an overall approach, the Committee is of the view that the long-term interest of both parties can be found in a less prescriptive policy on market access, “whether a reformed approach to equivalence or something closer to the non-discriminatory, outcomes-based deference model increasingly favoured globally”.

It calls on the UK Government not to disregard the value of a close UK-EU relationship in financial services when making future changes to regulation in the financial services sector and notes that changes should be “transparent and designed to enhance the attractiveness and competitiveness of the UK’s financial services sector”.

It also encourages the UK Government to use the UK’s innovative leadership to maintain high standards in financial services regulation on the global stage.

Whilst the markets continue to eagerly anticipate the MoU, it remains clear that political motivations and divergent views continue to make specific decisions related to the EU-UK relationship on financial services particularly difficult at this stage.