Brexit and financial services

What’s at stake?

Financial services made up 6.9% of the UK’s total output in 2018 and contributed £29 billion in tax in 2017/18. London (and the UK more generally) has benefited from close commercial and regulatory integration with the EU.

Single Market rules allow financial businesses authorised in any Member State to operate freely across the European Economic Area (EEA). This system is known as passporting.

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.

The quest for equivalence

That exclusion has led to a focus on “equivalence”. This allows market access in specified activities if both parties agree that underlying regulatory approaches will achieve comparable outcomes. It assumes current and continued regulatory alignment.

The UK’s original ambitions for Brexit negotiations recognised the interconnected nature of financial services, while aspiring to more autonomous decision-making. But equivalence decisions depend on continued compatibility between regulatory outcomes. They are subject to review and unilateral cancellation. The process of agreeing frameworks can also be slow and subject to wider political considerations. The EU recently withdrew equivalence from Switzerland. They referred to both Swiss “delays” on agreeing wider arrangements and the challenges of Brexit.

The 2018 Political Declaration aimed to build a more robust and transparent “equivalence plus” regime. New institutional arrangements would have supported the approach. But the details would only have been identified and negotiated after the Withdrawal Agreement was ratified. The October 2019 Political Declaration gave less emphasis overall to close alignment, although the financial services text was identical.

Preparing for the future

The UK has continued to incorporate EU financial legislation into UK law and regulation. 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, but the Bill fell at the end of the parliamentary session. So maintaining alignment with the EU after Brexit will require new primary legislation.

A no-deal Brexit would make the quest for equivalence more difficult. The UK would revert to third-country status. Both parties have made some provision for such a scenario to help ensure some continuity. The UK has developed 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 EU has agreed and extended a temporary recognition regime for the derivatives market.

This version incorporates the implications of the first Johnson Government’s position.