Expert Insights

Expert Insights

Brexit and Financial Services – After the Transition Period


31 January will not be the only “Brexit Day” in 2020.

While the United Kingdom (UK) will cease to be a member of the European Union (EU) on 31 January 2020, it will remain largely subject to EU law until the end of a transition period (TP). The TP is due to expire on 31 December 2020 (though it remains possible that the TP could be extended by mutual agreement of the UK and the EU). What will happen after the TP is still unclear – and will be the subject of intense negotiation between the UK and the EU.

On 27 January 2020, John Glen MP, the Economic Secretary to the Treasury, wrote to Lord Kinnoull, the Chair of the House of Lords European Union Committee, to set out some of the Government’s ambitions and priorities for the financial services sector in the context of the UK’s relationship with the EU following the end of the TP. 

This letter provides useful insight both into what the Government is likely to seek during its negotiations with the EU and therefore what the future may hold. The letter builds on the Political Declaration that accompanied the Withdrawal Agreement and is a timely reminder of what Brexit may mean for the financial services industry.

The letter begins by setting out some of the “no deal” measures that the EU has put in place before discussing the Government’s current thinking regarding the UK’s future relationship with the European Economic Area (EEA) and with non-EEA states. We discuss the content of the letter below.

The possibility of no deal

It is interesting to note that the letter’s opening paragraph makes explicit reference to a “no deal scenario”. Although there seems to be a general assumption that a “deal” will be concluded, it is clear that “no deal” remains a possible outcome.

The Economic Secretary refers to the temporary equivalence decisions that the European Commission has made in respect of the UK under (i) the European Market Infrastructure Regulation on Central Counterparties and (ii) the Central Securities Depositories Regulation. Mr Glen says that “while these decisions only take effect in a 'no deal' scenario, it is important that both the UK and the EU can continue to benefit from UK CCPs being able to offer their services to EU counterparties in all circumstances”.

In his letter, Mr Glen observes that the European Commission adopted the temporary equivalence decisions “in order to address financial stability and market integrity concerns in the EU”. While this is essentially a political aside (implying that the EU is concerned about the possible impact of “no deal” on its financial services sector and wider economy) it also gives an indication of how the Government expects that the “no deal scenario” would be managed.

This expectation seems to be that, where “financial stability and market integrity” are best served by preserving current arrangements, practical steps would be taken to maintain the status quo. The fact that the letter also says that the Government will have “temporary power, for up to twelve months after exit day, to make equivalence directions and exemption directions only for the EU and EEA member states” suggests that this would be expected to be a reciprocal process. In the event of “no deal”, therefore, it appears that the Government expects that both parties would agree to implement a temporary regime of short-term permissions. While such a regime would obviously be far from ideal, firms may take some comfort from the indication of the steps that would be taken if negotiations were to break down.

The rest of the letter, moreover, makes clear that the Government is not actively working towards “no deal” but rather is focused on building a new partnership with the EU.

Relations with the EEA following the TP

It is likely that one of the principal themes of the Brexit negotiations will be the trade-off between regulatory autonomy and market access. In short, the more autonomy the UK Government wishes to have over regulation, the more difficulty UK businesses may face in accessing the EU market. The Economic Secretary’s letter tries to minimise the potential for tension between autonomy and access.

Mr Glen begins his discussion of post Brexit UK-EU relations by saying that the “the UK ambition is for a future relationship with the EU that respects the autonomy of both Parties….” but goes on to say that the Government is seeking, “a deep and comprehensive future relationship with the EU”. In terms of how the Government wishes to combine its ambition for “autonomy” with its hope for “a deep and comprehensive” relationship, the Economic Secretary adds that the future relationship should include “arrangements that encourage us to work together constructively to stabilise the current equivalence framework”.

Equivalence is the concept that a non-EEA state may have a regulatory regime in a particular sector which is of an equivalent standard to the standard that applies under EEA law. Depending on the nature of the equivalence determination, the equivalence regime can allow firms in such a non-EEA state to provide services to EEA persons without needing to be authorised under EEA law. The practical effect of equivalence can therefore be said, in some instances, to resemble passporting (in terms of access). There are, however, certain important differences between passporting and equivalence.

One of the main drawbacks of equivalence (when compared to passporting) is that an equivalence determination may be withdrawn on short notice at the discretion of the European Commission. Such inherent uncertainty means that firms may be reluctant to make long-term plans, or significant investment, on the basis of an equivalence determination made under the current regime. It may be for this reason that the Economic Secretary refers to working with the EU to “stabilise the current equivalence framework”.

If an equivalence determination could be made more “stable” firms may feel better able to rely on it. The letter suggests that the Government may be seeking a new type of equivalence determination that could not be revoked easily by the European Commission. Such a determination could constitute a long-term basis on which some UK firms could provide some financial services into the EEA without needing to be authorised under EEA law.

It is worth noting, however, that not all EU directives include equivalence regimes (there are no such regimes for mortgage lending or insurance mediation for instance) so even if equivalence were “stabilised” in those areas in which it is available, it would be no assistance in those areas in which it is not available.

It is also worth noting that, in order to benefit from equivalence determinations, the UK would have to accept some practical limits on its regulatory autonomy (if it wanted to maintain the benefit of the relevant determinations). While the UK regulatory regime would not need to be the same as the relevant EU regime, UK regulatory regime would need to be equivalent to the relevant EU regime. The fact that the Government seems set on pursuing a version of the equivalence regime strongly suggests, therefore, that it is not planning a programme of radical regulatory reform in those areas where equivalence is available.

With questions being asked about the extent to which the UK may “de-regulate” after Brexit, this provides a useful steer (albeit not cast-iron certainty) to some UK financial services firms that they are unlikely to see significant change to the regulatory regime under which they operate.

Relations with non-EEA states following the TP

During the TP, the UK will benefit from the EU’s equivalence arrangements with third countries. When the TP comes to an end, the UK will cease to have access to these arrangements. Mr Glen provides some reassurance, however, that “the Government has had discussions with a number of jurisdictions in order to ensure that there is regulatory continuity of financial services market access arrangements”. While the UK Government obviously cannot guarantee that these jurisdictions will grant the UK any reciprocal equivalence arrangements, firms will be comforted to see that work is ongoing to encourage them to do so.

The Economic Secretary also notes that, following Brexit, “the UK could make an equivalence decision for a third country when the EU had not”. Mr Glen goes onto say that “the equivalence process will be one of the key tools to facilitate cross-border financial services activity in the UK and it will be for the Government to decide how to exercise this in the UK's interest”. Given that the ability to agree free trade deals with non-EEA countries has been described as an important advantage of Brexit, the Government may be motivated to enter into reciprocal equivalence arrangements with more third countries than the EU.

While such an approach would provide additional international opportunities for UK financial services firms, the Government may also be mindful of the potential risks of granting equivalence to jurisdictions that do not in fact provide for equivalent customer protection etc. UK firms may also be concerned if they believe that they face unfair competition from third party firms which operate under a more relaxed regime. The decisions as to whether or not to grant equivalence to third countries post-Brexit will therefore be subject to a range of competing considerations; this will be an interesting issue to follow post-Brexit.


  1. “No deal” remains an option. It does not appear, however, to be the Government’s desired outcome. The Government seems committed to minimising the negative impact of “no deal” in the event that such a scenario arises.
  2. The Government wants to balance regulatory autonomy with market access and will try to work with the EU to build a stabilised equivalence regime. This is likely to mean seeking a regime in which equivalence determinations cannot be easily withdrawn.
  3. The focus on equivalence suggests that the Government is not planning radical change in those areas in which equivalence is available.
  4. While the Government may also seek equivalence in areas in which equivalence is not currently available, there is no indication that it will do so. If it does not do so then there is unlikely to be any replacement for passporting in those areas (and the Government will have more scope to implement regulatory changes).
  5. The Government may well seek to replicate the EEA’s existing equivalence arrangements with non-EEA states and may also seek to enter into such arrangements with other non-EEA states.

For more information please contact William Garner, or Richard Ellis.

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