The past few weeks have seen a general thawing of relations between the EU and UK, which up until that point could at best be described as being ‘prickly’ or ‘distrusting’. This improvement in relations culminated in mid-May in the EU formally signing off 2020’s Brexit trade deal with the UK government.
While the EU’s signature on the trade deal was never really in doubt, it has been accompanied by other positive signs of the EU and UK putting aside some of the rhetoric and getting on, in this post-Covid era, with developing new structures to enable agreement on ways to expand existing arrangements on trade as well as services.
Following ratification of the trade agreement by the EU it will now be possible for the Joint Partnership Council to meet with the intention of resolving disputes and working through potential new opportunities for trade flows between the EU and UK. This improvement in the relationship between the EU and UK can only be seen as a good sign, opening up the possibility of both sides moving towards a deeper relationship based on stable structures.
In March, the EU and UK agreed the text of the memorandum of understanding (MoU) that creates a framework for voluntary regulatory cooperation on financial services. The MoU will establish a joint UK-EU financial regulatory forum facilitating high-level discussions on financial services. It is hoped that by securing a common framework around certain financial services rules this could help unlock some ‘limited equivalence’ decisions, thereby allowing UK companies access to the wider EU market. It is understood that the forum’s activities will include informal discussions on decisions to adopt, suspend or withdraw equivalence.
While the MoU is a long way away from the pre-Brexit position of passporting rights, it can be seen as representing perhaps the first tentative steps towards ‘equivalence’
While the MoU is a long way away from the pre-Brexit position of passporting rights (whereby UK financial services companies could operate freely within the EU member states whether that be in Frankfurt, Paris or Rome), it can be seen as representing perhaps the first tentative steps towards ‘equivalence’, allowing UK-based financial institutions EU-wide access for so long as UK regulations stay roughly in line with those from Brussels. However, even if equivalence were to be granted to UK financial institutions at some point, under the current regime, the EU could unilaterally withdraw an equivalence decision at relatively short notice.
While the EU has stated that it does not foresee any immediate moves to equivalence beyond that which is being currently granted in respect of derivatives clearing and securities settlement, national regulators in Luxembourg’s Commission de Surveillance du Secteur Financier have issued temporary equivalence decisions to the UK to bridge the gap in relation to the Markets in Financial Instruments Regulation or services provided to Luxembourg eligible counterparties and professional clients without the need for the relevant UK financial institution to open up a branch there. Meanwhile, Italian securities regulator Consob is allowing UK banks and investment companies to continue to operate while they seek authorisation to do so in Italy.
May has also seen the UK grant full diplomatic status to the EU’s ambassador in London, finally resolving a dispute that has strained relations between the two sides since the Brexit deal was finalised. This has led the European Council president, Charles Michel, to comment that the ratification would open a “new era of cooperation”.
There is even talk of Brussels possibly accepting a more pragmatic approach towards border checks on goods and produce passing between the UK and Ireland. Following the resignation of Northern Ireland’s First Minister Arlene Foster, there is an impetus from Dublin, Brussels and the UK government to see a reduction in the polarisation of politics in Northern Ireland, which has stemmed from these border checks and the UK government extending unilaterally the grace periods for adoption of stricter Irish border checks. Lord Frost, the UK Brexit minster, is in talks with the EU to find ways to resolve the challenges of the Northern Ireland Protocol. With the UK set against any move towards alignment of rules and regulations, a solution may have to be found based around a more liberal interpretation of the rules on how to conduct checks of goods and produce at the border. This may be part of a new reality that the EU is prepared to accept under pressure from Dublin.
Indeed, as the mood among UK businesses brightens post-Covid, and with New York and Singapore demonstrating that it is possible to operate extremely successfully as ‘third countries’ for the mutual benefit of these financial centres as well as the EU, there is perhaps a growing realism in both London and Brussels that now is the time to put past political wrangling to one side and start to develop the structures for a long-term relationship for financial services that can be of benefit to both parties.
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Alan Farkas is a London-based partner at the international law firm Dorsey & Whitney, which specialises in advising companies about Brexit, mergers and acquisitions, banking, private equity and the financial services industry.