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Winning Ways: EU Trade – UK Financial Law

With a new prime minister at the helm, the UK’s priority will be economic success and how best to use Brexit freedoms to build Britain’s global role as a trading nation. Though the news headlines tend to be about goods trade – cars, machinery, pharmaceuticals, agri-goods, which count among the UK’s biggest exports – the real economic success story is services.

Financial services trade is central to the UK’s prosperity and exports. But already there are fears that the proposals on the table for equivalence-based EU-UK trade, which would be broadly on grounds of ‘mutual recognition’, may be watered down or halted by Brussels. This week, for instance, Switzerland, which is outside the EU and enjoys an equivalence-based relationship across a number of areas, faces a possible expiry of those arrangements with the EU for Swiss stock exchange business. This may be a sign that the EU will make things difficult for the UK.

The UK’s new EU relationship for the financial sector will therefore need careful preparation. Fundamental to success will be putting in place a framework which recognises UK sovereignty and the fact that the UK will operate under UK, not EU law. But provided a start is now made, it should be possible for the UK to reach an Enhanced Equivalence deal for the sector to be ready for 31 October, Brexit Day.

There is little room for manoeuvre. The Withdrawal Agreement’s ‘implementation period’ proposed that the UK financial services system be governed by the EU for up to 3 or so years, but this was roundly rejected along with that Agreement. Aside from sovereignty concerns, the prospect of the UK being a rule-taker in financial services, even for a period, introduced unacceptable risk for UK taxpayers. In financial services there is a constant deluge of new EU measures, tailored for EU purposes not those of the global markets hosted in the UK. So any new arrangements, to be practicable, need to be truly arms-length and based on the inter-state deference shown by the EU to numerous other countries around the world. And they must be in place by Brexit Day since that provides the most viable solution for an interim, or temporary standstill, arrangement pending negotiation of a wider Free Trade Agreement across goods and services.

Proposals and the text with heads of terms for an agreement, prepared by me in two separate publications with Politeia, A Template for Enhanced Equivalence and Free Trade in UK-EU Financial Services, have already been circulated to officials. Now, with the right teams to negotiate the final wording, an agreement, reached already in principle, can be finalised well in advance of Brexit day. The drafting in these texts is neutral, providing for a sovereign-to-sovereign arrangement.

The UK would propose:

  1. equivalence-based access, with the same scope as the current passporting measures, where each party’s financial businesses obtain access to the other’s markets subject to their financial rules achieving similar high level outcomes. This is on the basis of a model the UK developed in EU law whilst within the EU, which is in use by the EU in its relations with tens of countries around the world;
  2. an automatic right for equivalence-based access on any future topics where the EU introduces a further passport, for instance for Capital Markets Union, or the UK introduces another equivalence-based recognition regime. That way both parties can genuinely collaborate on future market improvements knowing they are working towards a mutual end;
  3. clear provision that the outcomes required by the equivalence concept should be defined at a high level, based on international standards where possible, and only legitimately referable to a party’s own systemic risk, in the case of the wholesale markets, and consumer protection, in the case of the retail markets, consistent with how equivalence already operates; and
  4. an independent tribunal, with an ability to call on expert evidence, should oversee the application of the outcomes-based equivalence definition by both parties, such that in the normal manner of FTA-based trading arrangements, each party commits to abide by their word.

Such a financial services agreement would bring many advantages. It gives the parties what they both essentially have agreed they want, in the current Political Declaration. And it does so without the poorly drafted terms of the thrice rejected Withdrawal Agreement. The differences between the UK and the EU are after all largely over how to get to the desired end result, not the broad outlines of what that end result should be. This is a sector for which the parties can and should implement their preferred arrangements swiftly now. They should do so with a short term – standstill – agreement, whilst negotiating a mutually advantageous future across goods and services.


Barnabas Reynolds

Barnabas Reynolds is a partner at Shearman & Sterling LLP and Global Head of the Financial Services Industry Group. He is the author of Restoring UK Law: Freeing the UK’s Global Financial Market, (2021), The Lawyers Advise: UK-EU Trade and Cooperation Agreement – Unfinished Business? (2021), and Politeia’s new publication, Rules for the Regulators: Regulating Financial Services after Brexit.

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