With hours to go to the end of the Brexit transition period deadline, the EU-UK Trade and Cooperation Agreement (TCA) was signed by both sides thus coming into provisional effect (pending formal ratification by the EU). 

While those trading cross-border in goods have breathed sighs of relief, the agreement, as expected, contains limited rights in respect of the provision of services, and in particular, of financial services. The UK financial services industry has lost all passporting rights into the European Economic Area (EEA) and, in the absence of equivalence decisions being made, will need to rely upon authorisation under individual member state regimes. In a welcome move, some member states have provided some limited transitional relief for financial services firms, eg Italy and Portugal have provided reliefs, respectively, to enable firms to continue to provide services whilst their ongoing local authorisation is considered and to service existing banking or payment contracts for a transitional period, among other provisions.

The TCA has a small chapter on financial services and most general services provisions apply to financial services. However, unlike the regime for trade of goods, this does not give any preferential access to UK firms, but either confirms existing rights or contains agreement to co-operate in certain areas. There is a parallel declaration which commits both sides to establish a memorandum of understanding (MoU) or co-operation framework in respect of dialogue on financial services and equivalence-related processes and enhanced co-operation and co-ordination including in international bodies as appropriate by March 2021. This will presumably build upon the existing MoUs that have been put in place between individual regulators (eg between the UK Financial Conduct Authority (FCA) and European Securities and Markets Authority (ESMA), and the FCA and EEA national competent authorities).

Will equivalence be granted to the UK?

The EU negotiating position that access to the EU single market for financial services could be provided only by the existing equivalence mechanism (rather than the more ambitious mutual access the UK wanted) has prevailed. This comes as no surprise – the UK conceded the point a long time ago. The UK has already granted equivalence to the EU in most areas. However to date, temporary equivalence has been granted by the European Commission only to UK market infrastructure providers where necessary to address financial stability concerns (to central securities depositories until June 2021 to give more time for the settlement of trades in Irish instruments to be transferred to Euroclear Bank Belgium and to the three UK central counterparties (CCPs)). The temporary nature is consistent with the EU’s desire to move euro clearing and trading to within the EU. The Commission, which is considering information provided by the UK Government in respect of granting equivalence in respect of 28 potential further areas, has announced that it will not make any further equivalence decisions 'at this time'. The Commission’s stance is that it is continuing to wait for further clarity on how the UK will diverge from the EU framework. Therefore, in the short term, firms should plan on no further equivalence measures being granted.

However, in the longer term, a small level of optimism remains: the fact that a trade agreement was reached at all rather than the negotiations breaking down brings a more constructive atmosphere to the Commission’s considerations on equivalence decisions; and the non-granting of equivalence in certain areas disadvantages EU financial service entities which may lead to political pressure on the Commission to grant equivalence in certain areas, eg the extra capital that will need to be held by EU banks having exposures to the UK financial sector which will now need to be treated as third country exposures under the Capital Requirements Regulation or the conflicting obligations caused by the lack of equivalence in respect of the derivative trading obligation (DTO) under the European Market Infrastructure Regulation (EMIR). In the absence of mutual equivalence on the DTO, the FCA has used its temporary transitional powers to avoid conflicting obligations on UK firms by modifying the UK DTO to ensure that those trading with, or on behalf of, EU clients can transact or execute trades on EU trading venues, subject to certain conditions.

Financial services provisions 

The financial services specific provisions in the TCA are extremely limited and consist of:

  • general commitment to implement international standards in the area of prudential, anti-money laundering, tax avoidance and anti-terrorism standards;
  • new services provision: the TCA covers any new service that could be supplied under existing regulation; and
  • guarantee of access by foreign firms to any self-regulatory bodies required for the conduct of their business and to public clearing and payment systems.

All of this, and the rest of the TCA so far as it affects financial services, is subject to a prudential carve out: each side may take any measure deemed necessary for consumer and investor protection or the integrity of its financial system.

The TCA does not contain similar provisions found in the EU-Japan free-trade agreement in respect of regulatory co-operation, this will be dealt with in the financial services MoU as set out in the parallel declaration. The relegation of these arrangements to an MoU (in contrast to EU-Japan) is in line with the way the EU has jealously guarded its financial services regulatory autonomy vis-a vis the UK throughout the negotiations.

General services and investment provisions

Rights of commercial establishment of a subsidiary are confirmed with respect to legal form, rights to foreign ownership, equal treatment with domestic and other foreign firms and the prohibition of nationality tests for management. Where cross-border trade in financial services is permitted, there are general national treatment provisions and assurances that cross-border supply will not be made conditional on commercial establishment.

However, there are several reservations to the general rules in respect of financial services including that the UK and EU have:

  • exempted financial services from the general most favoured nation (MFN) provision: any preferential financial services terms granted in the future to another jurisdiction need not be extended to the other party;
  • reserved the right to impose a specific legal form on a financial services subsidiary on an MFN basis; and
  • carved out a right to adopt any measure limiting cross-border trade in financial services unless there are pre-existing WTO commitments to cross-border access.

The overall effect is that the TCA only confirms existing general rights rather than confirming any new rights.

Dispute settlement

Part Six of the TCA establishes a classic international law dispute settlement system pursuant to which the contracting parties (EU and UK) can bring disputes about the interpretation and application of the TCA. The provisions do not apply to disputes brought by private parties and there is no investor-state dispute settlement mechanism.

The dispute settlement process is based around a consultation procedure, which can lead to arbitration by a tribunal of three arbitrators if the parties are unable to reach agreement. However, the parties can agree to proceed directly to arbitration and dispense with prior consultation. There is no permanent arbitration court or panel. Instead, the parties will seek to agree on the appointment of an arbitration tribunal or, failing such agreement, they will follow the party appointment procedure provided for in the agreement with selection from pre-designated lists of arbitrator candidates. The agreement provides for a strict timetable for the tribunal to deliver its ruling, which is halved in cases of urgency. If the arbitration tribunal finds that there is a breach of the agreement the party concerned shall take the necessary measures to comply immediately with the ruling in order to bring itself into compliance. The agreement provides for a system of temporary remedies in the event of non-compliance, involving the suspension of obligations under the agreement. The suspension of obligations is not to exceed the level equivalent to the nullification or impairment caused by the violation. Obligations in relation to financial services may not be suspended under this procedure, unless the ruling of the arbitration tribunal concerns the interpretation and application of obligations in respect of financial services. 

Other ancillary measures

The TCA contains some helpful ancillary measures that will be useful for the financial services industry:

  • a time-limited 'bridging mechanism' to allow personal data to continue to be used cross-border as currently whilst EU adequacy assessments for the UK are considered;
  • agreements enabling financial services professionals to travel (subject to current COVID-19 restrictions) and conduct business in the EU on a short-term basis (including secondees); and
  • provisions creating a basis for ongoing co-operation on AML and counter-terrorism financial policy.