July 6, 2021
The EU and UK have struck a trade deal but this agreement does not cover financial services. This leaves both sides of the financial services industry with a challenge in the absence of any equivalence decision that will provide for easier access to each other’s markets based on similar rules, signalling regulatory divergence between the EU and UK.
Explore our insights on how to navigate this new landscape.
As of 11pm on 31 December 2020, the transition period ended and EU law no longer applies in the UK. On 24 December 2020, the EU and the UK agreed a landmark Trade and Cooperation Agreement, together with a Political Declaration on a number of areas, including financial services.
While the fact that a trade deal agreement was reached is good news, as expected, the deal did not specifically address financial services.
Importantly, the agreement does not provide any form of licensing relief to UK investment firms. Brexit meant the loss of the MiFID services passport as a basis to provide services into the EEA and this agreement does not change matters. UK firms now therefore, require individual EEA member state licenses or exemptions (or where relevant, reverse solicitation) in order to provide investment business services in Europe. EU firms now require UK authorisation to provide investment services into the UK.
In March 2021, the EU and UK secured a Memorandum of Understanding (MoU) on financial services as a basis for the ongoing relationship between the two parties but the MoU does not detail any decisions about regulatory equivalence. The MoU will not automatically lead to market access for UK firms, and is similar to the existing deal between EU and the US.
A critical aspect to any future equivalence decisions is the degree to which the UK/EU rules will remain equivalent and how and when they will start to fragment. There are a number of current initiatives that point to divergence of EU/UK rules that are already on the table (e.g. the EU and the UK's review of MiFID II, the FCA looking to implement a new prudential regime for financial firms which differs slightly to the EU’s regime, UK rules for the settlement discipline regime part of CSDR and limiting the application of DAC 6 tax reporting in the UK) Firms should monitor these various regulatory changes impacted by the divergence and prepare in advance, as the UK is highly unlikely to be granted equivalence by the EU.
The telling point will be how the UK reacts when the EU adopts new legislation, which could be as soon as Q3/4 2021 with the EU’s MiFID II and AIFMD reviews and further ESG reforms on the way.
In the wake of Brexit, many firms are in the process of restructuring their activities to be able to operate across different jurisdictions to enable them to continue to grow their business and serve clients across the UK and Europe.
Pershing is prepared to fully support clients with robust and resilient operations across all of our EMEA entities.
As part of BNY Mellon, a global financial institution, and with Pershing EMEA’s strong presence in Ireland, the UK and Jersey, we continue to be well placed to service clients, minimising any potential challenge, turbulence and disruption to Europe’s capital markets and to our clients, and supporting our clients as they navigate their own Brexit planning.
Linda Gibson, Director of Regulatory Change (July 2021)
The industry has now largely given up any hope of being granted equivalence and expects agreements to fall well short of free market access. We recommend that firms do not put their business strategies on hold and expect free market access to be resumed on the basis that the UK will become equivalent. Additionally, the unstable nature of equivalence approvals, which can be withdrawn without formal notice, also means that firms may prefer to rely on the more permanent solutions that they have already adopted.
Firms should also note that in January 2021, ESMA issued a statement reminding firms of the MiFID II rules on reverse solicitation, and the provision of investments services to retail or professional clients by firms not established or situated in the European Union (EU). EU regulators are also said to be alert to UK firms who continue to provide services to customers in the EU by including on calls a colleague, or “chaperone,” who is regulated to work in that EU jurisdiction.
ESMA called out that with the end of the Brexit transition period, some ‘questionable practices’ have emerged as some firms appear to be trying to circumvent MiFID II requirements.
ESMA’s statement is not ‘new news’ - reverse solicitation must always be at the client’s own exclusive initiative. It is, however, a reminder and a warning shot from ESMA to UK firms on certain behaviours that it sees as not being in compliance with the law, and it’s also putting the local EEA regulators on point to monitor and take action. Whilst reverse solicitation remains an option, we recommend that firm proceed with caution and take legal advice where necessary.
Pershing’s Regulatory Change team continues to monitor the evolving regulatory situation and is working closely with colleagues across the EU as well as industry bodies to ensure we remain prepared as the situation evolves.