What does Brexit mean for financial services? This briefing reviews progress and possibilities – from the 2018 Political Declaration to preparations for Brexit with no deal.Jump to full report >>
Financial services are an important part of the UK economy, making up 6.9% of total output in 2018 and contributing £29 billion in tax in 2017/18. As a major international financial centre, London (and the UK more generally) has benefited from increasingly integrated commercial and regulatory relationships with the EU.
The vote to leave the EU presents a range of challenges for the sector. Membership of the Single Market has allowed financial businesses authorised in any Member State to operate freely across the European Economic Area (EEA). This system – known as passporting – reflects both the EU’s overall political aspirations and a more practical alignment of regulatory systems in each Member State.
The logic of Brexit challenges both of those foundations. Once the UK had confirmed its intention to leave the Single Market, the EU explicitly ruled out sector-specific arrangements – such as passporting – that might have maintained existing benefits.
That exclusion led to a focus on the possibilities arising from the existing alignment of regulatory systems – in short, a quest for “equivalence”. This is an approach in which states grant market access in specified activities on the basis that the regulations that underpin these activities are deemed to achieve comparable outcomes.
The UK set out its ambitions for negotiation in the Brexit White Paper in July 2018. This highlighted both the interconnectedness of the financial services market and the possibilities for autonomous decision-making. But that second point reflects one of the major challenges of relying on equivalence decisions – they depend on regulatory outcomes remaining compatible, so are subject to review and unilateral cancellation. In addition, the process of agreeing equivalence frameworks can be slow and subject to wider political considerations. Indeed, the EU recently withdrew equivalence from Switzerland, citing not only frustrations with Swiss “delays” on agreeing wider arrangements with the EU, but also comparisons with Brexit.
The Political Declaration that accompanied the draft Withdrawal Agreement aimed to build a more robust and transparent “equivalence plus” regime. This would be underpinned by new institutional arrangements. But the aspirational nature of the Declaration meant that the details remained to be negotiated during the implementation period that would have followed ratification of the Withdrawal Agreement.
The UK Government, the Treasury and the main financial regulators have continued to incorporate EU financial legislation into UK law and regulatory practice. In the event of no deal, the Financial Services (Implementation of Legislation) Bill 2017-19 would have enabled this to continue for two years after Brexit. However, the Government has not scheduled the remaining stages of the Bill. If it is not passed during the current parliamentary session, it will fall, meaning that maintaining alignment with the EU after Brexit will require new primary legislation.
So a no-deal Brexit makes the quest for equivalence more difficult. Leaving the EU without a deal means that the UK would revert to third-country status. Both parties have made some provision for such a scenario to give some degree of continuity for financial services. For instance, the UK is developing a temporary permissions regime to allow EEA-based businesses to continue to operate in the UK and to seek more permanent authorisation from the Financial Conduct Authority. The UK and the EU have addressed similar risks in the derivatives market (which is heavily concentrated in the UK, even for euro-based business) through agreeing a temporary recognition regime.
Commons Briefing papers CBP-7628
Authors: Steven Browning; Federico Mor