UK post-Brexit risks – professional qualifications and capital adequacy – April 2021
UK post-Brexit risks – professional qualifications and capital adequacy – April 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
- The UK and EU confirmed that no clarity would be available until at least the end of March 2021 after the next set of negotiations between the UK and EU
In April 2021, what do we know now?
- This summary seeks to summarise some of the key points about what is known and what remains unknown; further changes are inevitable and needed
- All of these risks need to be analysed for their potential impact and then suitably mitigated. Plan for the worst case and develop contingency plans. Strengthen all aspects of resilience for your business activities.
- Many regulatory changes impacting UK financial services activities started from 1 January 2021. Some changes are immediate; others contain transition periods.
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 committed to agreeing a Memorandum of Understanding (MoU) relating to financial services regulation by 31 March 2021.
MoU agreement at the end of March 2021
On 26 March 2021, the UK and EU both confirmed that “technical negotiations” had been concluded for the text of the UK-EU Memorandum of Understanding (MoU). The principles of this MoU were agreed in a Joint Declaration on Financial Services Regulatory Co-operation alongside the Trade and Cooperation Agreement (TCA).
The MoU, once signed, will create the framework for voluntary regulatory co-operation in financial services between the UK and the EU. The MoU will establish the Joint UK-EU Financial Regulatory Forum as a platform to facilitate dialogue on financial services issues.
- In the words of HM Treasury in a 26 March statement, “formal steps need to be undertaken on both sides before the Memorandum of Understanding (MoU) can be signed but it is expected that this can be done expeditiously”.
- “The MoU will establish the Joint UK-EU Financial Regulatory Forum, which will serve as a platform to facilitate dialogue on financial services issues,” a spokesperson for the European Commission said. “On the EU side, the MoU will take the form of a Union non-binding instrument, which requires endorsement by the Council.”
MoU and equivalence decisions
The MoU is separate from any eventual decisions on equivalence, a series of unilateral rulings that each side can make and which will offer market access to financial services.
While the MoU process is entirely separate to equivalence, some EU officials have said that securing a common framework around certain financial services rules could help unlock some limited equivalence decisions allowing UK firms access to the wider EU market.
An earlier draft of the MoU agreement suggested that the UK Chancellor of the Exchequer and the European Commission’s top financial services official should meet twice a year to discuss regulation. It also suggested that the forum’s activities should include:
- Informal consultations on decisions to adopt, suspend or withdraw equivalence
- Keeping the two sides informed on supervision and enforcement of rules
- Sharing information and analysis about the financial industry, including on taxation and efforts to fight money laundering.
The trade agreement signed by the two sides in December 2020 largely sidelined the finance industry. The EU has said since that it is in no rush to grant “equivalence” findings to restore British firms’ trading rights because it is concerned that the UK is moving away from EU standards, taking it further away from “equivalent” status.
Continuing uncertainties remain for now
Since Brexit took effect at the beginning of 2021, London-based financial firms have been largely unable to operate in the bloc, forcing many firms to move billions of dollars in assets and thousands of staff to the continent.
Lenders are being asked by the Bank of England to secure its approval before shifting jobs and business out of Britain into the European Union. The move signals a hardening of its stance over Brexit under Andrew Bailey, who became its governor a year ago.
Bailey has recently taken a tougher line with Brussels over its treatment of the UK financial services sector and, in February 2021, accused the EU of double standards.
Concerns for clarity, business opportunities and resilience
According to the Financial Times, the Bank is concerned about the impact on the resilience of firms’ operations that remain in London if more jobs and operations move to the EU to satisfy the demands of European regulators.
Finance chiefs have also expressed their concerns about the lack of clarity of a post-Brexit financial services deal which includes equivalence. Nevertheless, many firms still have possibilities to invest in new services and buildings within the City of London as part of business developments as they adjust to a post-Covid and post-Brexit environment.
For now, London also dominates the world’s £4.7 trillion-a-day foreign exchange market; it is the biggest centre for international banking and the second-largest fintech hub globally after the United States.
UK professional qualifications for UK individuals
- From 1 January 2021, and until further clarification is provided by the EU, UK professional qualifications are no longer recognised in the EU. British qualifications are no longer accepted across Europe in accounting, tax, auditing and other areas so this will make it harder for British citizens to work in the EU.
- This will affect a range of professions including lawyers, bankers, accountants and investment management so that those wishing to practice their trade in the EU after 31 December 2020 may need to requalify somewhere in the EU.
- Rules on whether UK qualifications will be recognised and who is eligible to hold certain professional roles vary between EU member states; many member states, including Belgium and Luxembourg, allow only EU citizens to qualify.
- For now, the TCA has created a framework that encourages further conversations on mutual recognition of professional qualifications so, to begin with, the UK government and UK qualification bodies can seek to strike deals with individual European governments and qualification bodies.
- Even if professional qualifications are eventually approved on an individual country basis, general EU travel rules have changed too. Since 1 January 2021, Britons are limited to up to 90 days’ travel within a six-month period without a visa for any reason including work-related activities.
- By contrast, EU citizens face few restrictions on moving to another state for work or leisure and can cross borders freely; UK citizens have now lost those rights to conduct work freely across the EU using professional qualifications.
- Generally, delivering any service within the EU – such as auditing accounts or working as a lawyer as well as all other professions – will require a work visa and in many regulated sectors also being registered in that country as a local professional.
- Visa policy is largely a matter for national EU governments, each of which has its own criteria for skills, language requirements and fees that vary depending on the needs of each country’s labour market.
Trade and transaction reporting
- The UK’s transaction reporting regime (TPR) under MiFID II will change because of Brexit, including connected obligations such as submitting financial reference data.
- This includes the need for trading venues to report for transactions on their venues by their EEA members, and EEA firms in the TPR who operate through a UK branch to start transaction reporting to the FCA.
Capital adequacy and prudential reporting
- In December 2020, the FCA published its first of three detailed Consultation Papers about the planned new UK Investment Firm Prudential Regime (IFPR) for FCA prudentially-regulated investment firms.
- The FCA currently plans to issue three consultations – two more during 2021 as well as its December 2020 consultation – before introducing the new UK prudential regime in January 2022.
- Many UK firms have already started their internal regulatory change projects to prepare for the EU’s similar new prudential regime that no longer covers UK firms. That extensive internal project work for readiness must now be refocused.
- Detailed requirements for new reporting will be announced gradually during 2021 and must be followed by all firms.
Timeline with relevant dates to be logged on regulatory calendar
- The MoU should be signed by 31 July 2021 so there will be more clarity afterwards and more actions for all firms to take in response to detailed aspects
All firms need to immediately continue their detailed planning and research for all impacts on their business activities, employees, stakeholders and clients.
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