UK post-Brexit risks - passporting and equivalence - February 2021 |

UK post-Brexit risks – passporting and equivalence – February 2021

UK post-Brexit risks – passporting and equivalence – February 2021


  • On 24 December 2020, the UK and EU announced that a free trade deal had been reached after many months of negotiations and delays
  • The “EU-UK Trade and Co-operation Agreement” (TCA) contains almost no clarity for any topics relevant to UK financial services
  • No clarity or solutions will be available until at least the end of March 2021 after the next set of negotiations is held between the UK and EU
  • This summary seeks to summarise some of the key points about what is known and what remains unknown; further changes are inevitable and needed

Regulatory Updates – a summary

Many regulatory changes impacting UK financial services activities started from 1 January 2021.  Some changes are immediate; others contain a short transition period.

All of these risks need to be analysed for their potential impact and then suitably mitigated.  Plan for the worst case and develop adequate contingency arrangements.  Strengthen all aspects of resilience for your business activities and related tasks.

Broad perspective for post-Brexit risk environment

With the loss of all passporting rights, all future business in the EU requires UK firms to negotiate rules and permissions in every EU state, individually or together if possible.

Under the terms of the TCA, the UK and the EU have committed to agreeing a Memorandum of Understanding relating to financial services regulation by March 31, 2021, establishing a framework for regulatory co-operation on financial services.  It also commits both parties to tackling international financial crime and tax evasion.

In his February 2021 Mansion House speech, the Bank of England governor Andrew Bailey said that, although the UK and EU are working towards a March deadline to agree an “equivalence” regime under which each would recognise the other’s regulations, “EU demands had so far been unreasonable”.

This comment follows the EU’s fears that the UK will adopt a low-regulation “Singapore-style” model that would undercut the EU.  The Bank’s governor stated that in his speech that, while some rules would change post-Brexit, sudden deregulation was not planned.

New rules and regulations – passporting and equivalence

  • The UK is going to be negotiating with the EU for years to come on a more or less constant basis. Resolving disputes as they arise will be a persistent focus as well as a likely cause of tension.  Arbitration systems will probably be tested to the limit.
  • “Equivalence” is an EU system that gives single market access to financial firms in “third countries” such as the UK if their home rules are considered by Brussels to be “equivalent” to, or as robust as, regulation in the EU bloc.
  • The EU’s caution in granting equivalence partly reflects its desire to learn more about the UK’s plans for any possible divergence from EU regulation after Brexit.
  • Although the UK has granted a package of equivalence decisions to the EEA states, providing EEA firms with greater certainty to continue their activities in the UK after 1 January 2021, the EU has so far granted equivalence in only two areas that it regards as essential to global financial stability: (1) for 18 months to clearing houses and (2) for six months to central depositories.
  • With the end of passporting on 31 December 2020, in order to access the EU single market, UK based financial services firms must now either (1) comply with the regulatory requirements for market access set at the level of individual member states or (2) rely on equivalence decisions.
  • Neither of these two approaches is a like-for-like replacement for the common EU-wide market access that the UK had enjoyed through passporting. Seeking permissions on a state-by-state basis will add complexity and costs for UK financial services firms.
  • Law firm Macfarlanes stated recently that equivalence will not give the UK the same level of access to the EU single market it enjoyed as a member state and that there are 59 possible equivalence decisions, all needing administrative processes.
  • Relying on equivalence brings changes in UK-EU financial services as it does not cover the same range of financial activities as passporting. Retail banking services including lending, payments and deposit-taking are not included, for example.
  • If it grants any equivalence in the future, the EU has said it will watch closely for any divergence from its own regulatory regime.
  • The EU is entitled to withdraw any equivalence decision unilaterally at any time with 30 days’ notice. It has previously exercised that right with other countries (for example, against Switzerland in 2014).  This permanent risk of changes creates further uncertainty and unpredictability for UK financial services firms.
  • All UK firms will need to analyse possible changes in detailed business strategies in response to these regulatory changes and EU-linked restrictions. At the same time, UK firms must consider specific risks including the end of prior business activities and the impact on their business models for accessing EU-based business activities.
  • All firms must now work closely with individual EU countries’ financial regulators so there may be many business rule variations to consider between EU countries.
  • Firms need to analyse possible solutions such as creating full EU-based business operations to replace UK operations, detailed planning for EU-compliant employee hiring or deployment and identifying UK employees who can no longer work in EU-based roles requiring professional qualifications.
  • As firms begin to operate without equivalence decisions by, for example, moving their assets, activities or employees out of London to other European financial centres, so the potential for these actions to be reversed quickly reduces even if eventually an equivalence determination is made.

Timeline with relevant dates to be logged on regulatory calendar

  • The next set of EU-UK clarifications is expected by 31 March 2021

Next steps

All firms need to continue their detailed planning and research for all impacts on their business activities, employees, stakeholders and clients.

If anyone has specific questions or needs any advice, contact our specialists.

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