The EU-UK Trade and Cooperation Agreement (TCA 2020) concluded between the EU and the UK on December 24th 2020 sets out preferential arrangements in areas such as trade in goods and services.
UK becomes a "Third country"
UK has the second largest financial hub in the world. Financial services contributes around £130B to the UK economy and 1.1 million jobs, of which £21B worth of services. are exported to EEA countries (2018 figures).
Contrary to popular belief, it isn't solely concentrated in the City of London, for example in Edinburgh, 10% of jobs are in financial and related professional services. Unfortunately financial services is not part of the TCA, apart from agreeing that it needs to be discussed in the near future. As a result, from the 1 January 2021,
UK financial services firms will lose their passporting rights.
Passporting has allowed firms to sell their services into the EU from their UK base without the need for additional regulatory clearances.
Passporting rights are reciprocal;
any member state can tout their services in any other member state. So there are EU entities which provide financial services to the UK, however the ratio between exports and imports has hitherto been asymmetric, the UK is a significant net exporter of financial services and is also the centre for Euro exchange.
What have the UK regulators done?
The UK financial services regulators (Bank of England (BoE), PRA and FCA) have published their updated approaches to temporary transitional power (TTP). They have provided information as to how their rules will apply at the end of the transition period. In effect granting passporting rights to EEA firms on a temporary basis until 31 March 2022.
What has the European Union regulators done?
To enable a smoother transition, they have granted interim for two specific areas; derivatives clearing (for 18 months) and settling Irish securities (for 6 months). Everything else is up for discussion and agreement.
Which leaves the UK with less EU market access, than firms based in other leading financial centres such as New York and Singapore.
Theresa May, Boris Johnson's predecessor has criticised the omission of Financial Services in the TCA.
What has been agreed so far?
Both parties have agreed to hold talks in early 2021 with the aim of producing a memorandum of understanding on future co-operation and a financial services framework.
What's in store for UK financial services?
Bear with me, this is crystal ball stuff, but I'll have a go.
- The EU is likely to allow UK Financial Services to serve EEA countries, but to a lesser extent than under passporting rules. The EU will retain the right to withdraw this with 30 days notice, which will naturally act as a deterrent for UK firms to develop and invest in the EU market.
- Frankfurt and Paris will grow in dominance within the EU market which may allow them to take a bigger slice of the global market, as they gain critical mass in terms of expertise and human resources.
- This is also an opportunity for Dublin to step-up and further develop the St George's Dock financial area, as their financial regulatory structures are regarded as less strict than say Germany's, but still within the Eurozone.
London has a small window of opportunity to keep ahead of the chasing pack by carefully treading between keeping close to the EU's regulatory orbit (to keep/attain EU equivalence) and loosening them to allow more creative financial structures and instruments.
Other Brexit-related articles I've written
Post-Brexit Data Protection and the EU
GDPR flies in the ointment - The question of equivalence and adequacy post-Brexit
GDPR - Nothing doing with us, were leaving the EU
Further reading
https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/articles/uktradeinservicesbyindustrycountryandservicetype/2016to2018
https://www.fca.org.uk/news/press-releases/brexit-countdown-uk-financial-services-sector
https://www.instituteforgovernment.org.uk/explainers/future-relationship-financial-services
https://www.dw.com/en/what-next-for-london-the-worlds-second-largest-financial-center/a-56101977
https://www.cliffordchance.com/microsites/brexit-hub/key-issues/brexit-financial-services.html
https://www.ft.com/content/3c07d219-b20a-4315-9f17-badb10a5279b
https://www.cityam.com/brexit-uk-to-start-talks-on-quick-eu-equivalence-deal-for-financial-services/
Personal commentary. Views are the author’s own.