Brexit: where are we now? And can "Equivalence" work?

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Introduction

On 31 January 2020 the United Kingdom (UK) officially left the European Union (EU) after 47 years of membership. A transitions period has commenced, during which the UK will stay in the EU customs union and single market and the EU law will still apply.1 When this transition period expires on 31 December 2020, UK will leave the single market and EU law will cease to apply. Unless an appropriate deal is struck between the UK and EU, many questions of cross-border trade will become highly unpredictable, including financial services, which are a major part of UK economy and are currently thoroughly regulated by provided according to EU law.

Why no deal is a real possibility?

Two possible outcomes are anticipated with regard to the end of the transition period; one where EU and UK agree on a deal to regulate their future relationship, and the other where no such deal is made. There are three plausible deal breakers potentially preventing the parties from reaching an agreement. Firstly, both parties have high interests regarding the fishing rights and UK has been traditionally displeased to allow other countries to fish in its waters. Secondly, the EU will require robust guarantees for a level playing field to ensure the UK cannot take unfair competitive advantage through competition or state aid divergence, taxation policy or by lowering environmental, social and employment standards. Thirdly, with less than 9 months left on the clock and an extension to the transition period looking unlikely, the parties are struggling with a serious lack of time. Taking all these factors into consideration a comprehensive agreement seems unlikely, whereas the parties may opt for a less comprehensive "bare-bones" trade deal, somewhere along the lines of EU-Canada FTA, which may not regulate the provision of financial services.

End of "Passporting" and beginning of "Equivalence"

Within the single market, a European financial institution, which has been authorised by the appropriate domestic authority can conduct business throughout the EU without the need to seek further authorisation - by "Passporting" its licence around the EU. The competent authority of home Member State remains responsible for the supervision of financial institution providing services elsewhere in the EU. After the transition period expires, the UK will no longer be able to rely on Passporting, therefore the "equivalence" regime will be used. This means that financial institutions may provide financial services within the single market, if EU authorities can rely on compliance of foreign entities with a regulatory framework with equivalent protection and supervision.

In accordance, the parties should start assessing equivalence of each other’s regulatory regimes for provision financial services in order to subsequently issue equivalence decisions. The equivalence decisions are unilateral and discretionary and are normally not subject to negotiation. However, both sides have shown that they are willing to and should discuss and consult in the process of issuing and revoking equivalence decisions.2 But that also means that it will be very difficult to issue them by 30 June 2020, the date envisioned by the parties and it is still questionable whether they may be only provisional pending an overall agreement with the UK and whether they will be permanent or temporary.

However, there are several problems with equivalence. It is very fragmented and only applicable on the EU side where the legislation so provides under the "third-country provisions". Also, here is no equivalence regime for lending and deposit taking activities. The ongoing situation between EU and Switzerland also goes to show that equivalence is far from easy to implement and that it can be withdrawn unilaterally or granted only temporarily. The equivalence regimes at least in theory favour arbitration or litigation in EU27 which will be very unfavourable from UK’s point of view. It is clear that even though we are very close to the end of transition period, the future of financial services is still highly questionable and unpredictable.

Additional considerations

Reverse solicitation

Another issue is reverse solicitation, a concept used across several EU financial services sectors, in accordance to which EU investors may reach outside the EU and acquire services and products from non-EU financial services providers. In the context of MiFID II, where a client requests services on their own exclusive initiative, there is no requirement for the third-country provider to set up a branch (in the case of a retail or elective professional client) or register or be authorized by the European Securities and Markets Authority.3 However, in must be noted that pursuant where a third‐country firm, will act through intermediaries in the EU to solicit clients or potential clients in the Union the exemption of reverse solicitation will not apply.

Recognition of choice of law and enforcement of judgements

In regard with the choice of law, Rome regulations will continue to apply, as they are not dependent on EU membership. The jurisdiction is still decided under the Brussels Recast Regulation during the transition period, however, after its expiry the question of jurisdiction may be resolved either by a continuity agreement or UK’s accession to the Hague Convention or Lugano convention. On the other hand, the jurisdiction under the New York Arbitration convention remains unaffected by Brexit.


1 https://www.cer.eu/brexit-timeline.
2 Political Declaration setting out the framework for the future relationship between the European Union and the United Kingdom, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/840656/Political_Declaration_setting_out_the_framework_for_the_future_relationship_between_the_European_Union_and_the_United_Kingdom.pdf.
3 https://www.nortonrosefulbright.com/en/knowledge/publications/7b888d30/brexit-and-financial-services---the-current-state-of-play#section3.