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It’s a (draft) deal! But what does it mean for financial services?

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Following a flurry of activity in Brussels and Westminster over the last few days, the UK and the EU have reached an agreement on the UK’s withdrawal from the EU and high-level objectives for the future relationship between the two.  The draft withdrawal agreement (all 585 pages of it) and the slightly shorter draft political declaration on the future relationship (checking in at just over 6 pages) have made headlines around the world, but what do they actually say about financial services?

The withdrawal agreement

Regarding the withdrawal agreement, the answer to that question is a short and easy one.  The agreement says precisely nothing about financial services.  This is neither unexpected nor a cause for concern for those in the industry.  The withdrawal agreement deals with the terms of the UK’s departure from the EU, and so primarily covers matters such as citizens’ rights and financial obligations.  The controversial Northern Ireland “backstop” (a protocol to the agreement) covers several areas where the laws of Northern Ireland (and, in some cases, also Great Britain) will follow those of the EU, but those areas are focused very much on measures to ensure the need for no customs or regulatory checks at the Irish border and to ensure a level playing field for goods.  Financial services do not fall within in any of those categories and so remain untouched in the withdrawal agreement.

The one area of the withdrawal agreement with arguably the most significance for the financial services industry is the transition period.  Under this section of the agreement, the UK will continue to be treated as an EU member state for most purposes until 31 December 2020.   This effectively means business as usual for financial services during that time, with a continuation of the status quo, including passporting.  Furthermore, the agreement provides for the transition period to be extended until an as yet unspecified date in the future. 

The future relationship

For all the detail in the withdrawal agreement, the political declaration on the future relationship is the precise opposite, with only 3 pages covering the future economic relationship between the UK and the EU. 

Financial services receive 3 bullet points (and 115 words to be precise) saying, well, not very much…

Particular points of note are:

  • The declaration stresses the autonomy that each party will have in their regulatory regimes and decision-making processes.
  • This includes the ability of both parties to take equivalence decisions in their own interests.  There is no mention whatsoever of the independent arbitration panel to determine disputes (and prevent unilateral withdrawal of equivalence decisions) or the longer lock-in period sought in the Chequers white paper and reported in the last few weeks as having been agreed.
  • Both parties do commit to starting their equivalence assessments in respect of each other as soon as possible after March 2019, with a view to concluding those assessments by June 2020.  This should mean that equivalence decisions can be in place from day one after the end of the transition period in respect of those measures that currently allow for third-country equivalence. 
  • It should be noted, however, that there is no suggestion in the declaration of extending equivalence for each party beyond those areas where third-country equivalence is already provided for. 
  • The declaration sets out some vague, aspirational intentions for close regulatory cooperation, but again emphasises the autonomy of each party (a recurring theme throughout the 3 bullet points). 

In short, this falls severely short of the agreement sought by the UK in the Chequers White Paper from July 2018 and its plans to base the future relationship on a form of “enhanced” equivalence.  It also appears to be far less extensive than the financial services “deal” reported in the press only a matter of weeks ago. 

Next steps

Of course, all of this may in any event be for nothing if the withdrawal agreement fails to win the approval of the UK Parliament (or indeed the EU27 Member States and the European Parliament, although it currently appears highly unlikely either the EU27 or European Parliament would oppose the agreement).  The UK Parliament’s approval of the agreement is by no means a certainty and, according to the views of a significant number of political commentators, indeed highly unlikely to gain approval, especially given the senior ministerial resignations and general backlash that followed the announcement of the agreement.  So, if Parliament were to reject the agreement, where would this leave us?

The practical reality is that absolutely no-one knows where that would take us.  From a legal perspective, the following points we do know:

  • Under the European Union (Withdrawal) Act, in the event that the House of Commons rejects the agreement, the government has 21 days in which to present to the House how it intends to proceed. 
  • Pursuant to Article 50 of the Treaty on European Union, the UK will leave the EU on 29 March 2019, simply by operation of that provision.  In the absence of a unilateral decision by the UK to revoke its withdrawal decision (the legality of which remains subject to a pending case in the Court of Justice) or a unanimous decision of the EU27 Member States to extend the 2-year time period, the UK is out with no agreement.  In other words, while the UK decides what to do the clock remains ticking. 

For the first time, when announcing the UK Cabinet’s approval of the deal on Downing Street, Theresa May conceded that one of the possibilities if the agreement were to be rejected was indeed “no Brexit”. 

Ultimately, not even the most accurate crystal-ball gazer could predict where this will go.  That said, what we do know from a financial services perspective is the scope of the agreed-upon destination is nowhere near as ambitious as either the UK government or industry had hoped, and that there is a very long way still to go.

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