Brexit Outline Political Declaration: Initial indicators for the financial services industry

Yesterday's announcements on the terms agreed for the UK's withdrawal from the EU say relatively little about the future framework for cross-border trade in goods or services. More detail is expected on this next week.

The draft withdrawal agreement provides that a transition period will continue until 31 December 2020. Although this was provisionally agreed in March 2018, yesterday's statements make this a more likely reality. The final deal remains subject to approval by the European Council, the EU Parliament and, crucially, the UK Parliament.

The draft agreement provides that during this period:

• EU law will continue to apply in and to the UK, as if it were a Member State;
• EU bodies such as the ESAs and the ECB will be able to exercise their powers over natural and legal persons residing or established in the UK;
• The provisions of Rome I will apply to contracts concluded prior to the end of the transition period;
• The provisions of Rome II will apply to non-contractual obligations in respect of damage arising from events occurring before the end of transition; and
• The ECJ's jurisdiction will continue with the same scope as currently exists.

These provisions will apply to financial services firms as they do to other areas. This means that current passporting rights would continue to apply until December 2020, allowing firms a window to take appropriate steps before they fall away.

Specifically on financial services, the Outline Political Declaration on the Future Relationship between the EU and the UK establishes the following three key principles:

• Commitments to preserving financial stability, market integrity, investor protection and fair competition, while respecting the regulatory and decision-making autonomy of the EU and the UK (the "Parties"), and their ability to take equivalence decisions in their own interest. This is without prejudice to the Parties' ability to adopt or maintain any measure where necessary for prudential reasons.
• Commencement of equivalence assessments by both Parties as soon as possible after the United Kingdom’s withdrawal from the Union, endeavouring to conclude these assessments before the end of June 2020.
• Close and structured cooperation on regulatory and supervisory matters, grounded in the economic partnership and based on the principles of regulatory autonomy, transparency and stability, recognising this is in the Parties’ mutual interest.

While it is difficult to draw firm conclusions for the financial services industry on the basis of such high level material, the three points outlined above contain some potentially significant indicators of the direction of travel for the future UK-EU relationship. This is particularly so when read together with the preferred model for financial services outlined by the UK in its White Paper of July 2018 (discussed in more detail here) as the outline declaration echoes this in some important respects.

The opening commitment to certain shared fundamental values is not surprising and reflects the existing values underpinning current EU (and UK) law and international standards for the financial services sector generally. It is difficult to argue with these principles, although past experience of EU negotiations indicates that there is ample scope for divergence on what these values mean in practice (and how national "prudential reasons" may limit convergence).

The statements on equivalence give a clearer signal on the potential positives and negatives of the emerging future relationship. Most notably, there is nothing in these statements to indicate a commitment to developing a regime to replicate the scope of the current passporting regime for firms. While this is not surprising in view of the negotiations so far, it is important to remember that the scope of the current equivalence regimes fall significantly short of replicating the current passporting regimes. The commitment to conclusion of equivalence assessments at least six months before the transitional period ends is undoubtedly welcome and the commitment to "regulatory and decision-making autonomy and ability to take equivalence decisions in [each party's] own interest" echoes the principles outlined in the UK's July White Paper.

However:

• A notable gap relative to the White Paper's "enhanced equivalence" blueprint is the commitment to extend current equivalence regimes into areas of financial services with no equivalence-based access rights, such as banking services and retail investment markets. We would also note that in some regimes, including in relation to alternative investment funds, the embedded equivalence regimes have not yet been 'switched on'. The announcements are silent on these.
• Moreover, a commitment to conclude an equivalence assessment does not automatically translate into a positive or timely equivalence decision (as past experience on equivalence assessments on central counterparty clearing have shown). In addition, under the current framework, positive equivalence can also be withdrawn unilaterally at any time.

Significant uncertainty therefore remains on how and to what extent cross-border market access may be achieved, and it is unlikely that this will be resolved by the full political declaration expected next week. It is hoped, however, that the commitment to "close and structured cooperation on regulatory and supervisory matters" may limit the risks of arbitrary or politicised decision-making and offer a framework for a constructive and transparent regulatory dialogue, particularly when read with the more general commitment to co-operation that extends "well beyond the parties' WTO commitments. Effective implementation of the assurances that the agreement will "facilitate electronic commerce and cross-border data flows", and "enable free movement of capital and payments" will also be essential to cross-border financial services.

So far as we can tell, the deal that has been reached also does nothing to resolve issues relating to contract continuity (including whether post-Brexit performance of pre-Brexit contracts triggers cross-border regulatory licence requirements). Contract continuity will likely be an issue to some extent for most UK firms with EU clients and counterparties, although the transitional period will allow for more time to explore effective solutions across different market products, including implementing contingency arrangements.