Where does the UK / EU trade agreement leave financial services, and what is next? May 2020

Markets Regulation

The EU–UK Trade and Cooperation Agreement (‘TCA’) contains very little to facilitate access to the EU’s single market for UK financial services firms. However, it is accompanied by a Joint Declaration, which, inter alia, obliges the parties to agree a Memorandum of Understanding on this issue. This note considers how these have affected the provision of financial services, and what may yet happen.

What does the TCA contain regarding financial services?

Excluding the scope and definitions sections, the financial services provisions take up slightly more than one page, in an agreement comprising over 1,200. This is because, as regards services, the TCA is merely intended to establish a favourable climate for the development of trade and investment between the UK and the EU. To this end, it provides a baseline for the treatment of services suppliers from the other side, imposing high-level non-discrimination and market access standards, although there are derogations even from these.

What does the TCA not contain regarding financial services?

The TCA does not retain passporting rights, nor does it address equivalence decisions. UK financial services firms accessing the EU’s single market therefore lost their passporting rights upon the expiry of the transition period.

This is not a surprise, and many firms have been planning for this eventuality since 2016 (the TCA arguably offers little more than would have been available had the UK defaulted to WTO rules). For example, some have set up separate group companies in the EU to continue servicing their EU clients, whilst others are relying on the concept of ‘reverse solicitation’ – i.e. if a customer “initiates at its own exclusive initiative the provision of an investment service”, no passport is required. However, firms using this latter approach should be aware that ESMA published a statement on 13January 2021 noting that “some questionable practices by firms around reverse solicitation have emerged”, and that “including general clauses in their Terms of Business or through the use of online pop-up “I agree” boxes whereby clients state that any transaction is executed on the exclusive initiative of the client” are unlikely to suffice.

Equivalence decisions

If the EU were to make equivalence determinations in favour of the UK, its financial services firms would be able to enjoy many (although not all) of the benefits they had under the passporting regime. However, despite the 2019 Political Declaration stating that both sides would endeavour to conclude their equivalence determinations by mid-2020, this has not happened, and the EU has thus far granted very few.

The Joint Declaration

Instead, the TCA is supplemented by a Joint Declaration on Financial Services Regulatory Cooperation, under which the parties have agreed to establish structured regulatory co- operation on financial services, with the aim of “establishing a durable and stable relationship between autonomous jurisdictions”. The framework for this should be codified in a Memorandum of Understanding, to be agreed by March 2021, and the parties shall discuss “how to move forward on both sides with equivalence determinations”.

However, a non-binding declaration to draw up a framework for future cooperation will be, of course, scant consolation to UK financial services firms for the loss of access to the EU’s single market.

Consequences for UK financial services firms

The almost complete lack of substantive provisions regarding financial services means that there is much uncertainty as to what will eventually be agreed. It is, for example, possible that the EU will grant equivalence decisions across a breadth of areas, and agree to additional measures making it more difficult for such decisions to be revoked. However, this may be highly optimistic, especially if the recent reports that Boris Johnson is holding talks with industry leaders to transform the UK into a lightly regulated ‘Singapore of Europe’ are true. Firms should therefore scrutinise any Memorandum of Understanding and follow updates regarding equivalence decisions, but should also ensure that their business models are ones which will allow them to continue to prosper if no further agreements are reached. Any financial services firms which have thus far postponed taking any action, hoping for equivalence decisions, or that ESMA would take a generous approach to the requirements of reverse solicitation, would be well- advised to plan on the basis that neither of these may occur. For those which have already expended significant effort on Brexit contingency planning, it is unlikely that this will be in vain.

If you wish to discuss this topic in more detail, please contact your relationship partner or Damian Morris at

NoticeThis publication, which we believe may be of interest to our clients and friends of the firm, is for general information only. It is not a full analysis of the matters presented and should not be relied upon as legal advice. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon the content of this publication without seeking advice from professional advisers. © 2019 Chancery Advisors Limited. All Rights Reserved.