In a frustrating twist to the dangerously slow-moving narrative on cross-border financial market access post- Brexit, ESMA yesterday (25 November) issued a public statement confirming the EU’s hardline stance to the derivatives trading obligation (DTO) under MiFIR. The DTO requires EU investment firms to trade certain classes of derivatives only on EU-authorised trading venues – or third country trading venues certified by the European Commission as equivalent. No such equivalence decision has been made or signalled by the EU for purposes of the DTO – and ESMA’s latest statement declines to offer any forbearance or similar relief to EU firms currently using UK venues for this purpose.
On 27 March 2020, the House of Lords EU Financial Affairs Sub-Committee published a letter from its Chair, Lord Sharkey, to the Chancellor of the Exchequer, Rt Hon. Rishi Sunak MP, emphasising the importance of the UK remaining actively engaged in shaping the future relationship with the EU in financial services.
In the letter, Lord Sharkey calls on the Government to establish a structured dialogue between the UK and the EU to support cross-border financial services and manage any future divergence. The key message from Lord Sharkey is as follows:
“While the Government is quite rightly currently focussing on the coronavirus pandemic, at some point it will need to return to considering the future of the UK’s financial services sector and negotiating its relationship with the EU.
“When it does, it should pay particular attention to how it will work with the EU to support cross-border financial services and manage any future divergence.”
The letter also sets out the following key points and recommendations which were reached by the Committee during its review of financial services after Brexit:
- while the UK is currently fully aligned with the EU, there is a risk that the EU’s equivalence decisions will be politicised and could be withdrawn at very short notice. There should be regular and structured dialogue to provide a forum for discussion and resolve any possible disagreements;
- the Government should delegate more powers to the financial regulators after Brexit, to give the UK’s regulatory regime more flexibility and increase its ability to respond to changes. This will require increased parliamentary oversight of the financial regulators’ activities; and
- the UK may wish to make some targeted adjustments to ensure that the regulatory regime is fit for purpose. The UK should take a leadership role in promoting international cooperation in financial services after Brexit by promoting global standards.
The letter also includes a longer annex highlighting key findings from the inquiry from various government, regulatory and industry sources. While much of this will be familiar territory to market participants that have remained engaged in the discussion on this area, the annex is a useful round-up of key perspectives on equivalence and the shape of the future UK-EU relationship.
The sections on financial services in the UK’s approach document are set out below:
Chapter 16: Financial Services
- The Agreement should promote financial stability, market integrity, and investor and consumer protection for financial services, providing a predictable, transparent, and business-friendly environment for cross-border financial services business.
- The Agreement should include legally binding obligations on market access and fair competition, in line with recent CETA precedent.
- The Agreement should also build on recent precedent, such as the EU-Japan EPA and international best practice, by establishing regulatory cooperation arrangements that maintain trust and understanding between our autonomous systems of regulation as they evolve. This could include appropriate consultation and structured processes for the withdrawal of equivalence findings, to facilitate the enduring confidence which underpins trade in financial services.
Equivalence in Financial Services
- The UK and the EU have committed to carrying out unilateral equivalence assessments for financial services, distinct from the CFTA. The fact that the UK leaves the EU with the same rules provides a strong basis for concluding comprehensive equivalence assessments before the end of June 2020.
Unsurprisingly, these are brief and outcomes-focused in nature, reflecting the Government’s approach more generally and the desire for “autonomous systems of regulation” (as preserved under the EU-Japan Economic Partnership Agreement) rather than close alignment. The comments on equivalence do serve as a reminder to the EU that the UK will nonetheless be starting from a position of close alignment, but as ever, there are no guarantees that this challenging deadline for completing assessments will be achieved.
On the same date, the European Commission has also published a speech delivered by Michel Barnier, the EU’s chief negotiator on its future relationship with the UK, addressing the potential for UK/EU co-operation post-Brexit. The tone of the speech is characteristically challenging of the UK’s perceived desire to preserve sovereignty and regulatory autonomy while maintaining access to EU markets. Mr. Barnier’s discussion of equivalence indicates the lack of appetite from the EU to develop a more extensive and durable form of equivalence for cross-border market access, as explained in the following extract:
[Equivalence in financial services]
“… The EU will have the possibility to grant equivalences. We will do so when it is in the interest of the EU; our financial stability; our investors and our consumers. But these equivalences will never be global nor permanent. Nor will they be subject to joint management with the UK. They are, and will remain, unilateral decisions.
I read in the Financial Times recently that London must retain its primacy as a hub for wholesale financial markets without becoming a rule-taker of European regulation. As a former Commissioner in charge of financial services, allow me to question that. Why should we accept that the profits stay in London while the EU carries the risks?
The UK may not want to be a rule-taker. But we do not want to be the risk-taker. When the next financial crisis strikes, who will foot the bill? I doubt the UK will foot it for the EU. That is why the EU must take the responsibility for its financial regulation, supervision and stability.”
The third episode of Regulation in Focus, our podcast series of short, sharp insights into regulatory issues that matter to you, features Katherine Dillon and Emma Reid from our non-contentious financial services regulatory practice in London, discussing the role that equivalence might play in accessing EU markets post-Brexit.
On financial services, the final political declaration contains essentially the same three points as in last week’s outline political declaration (the implications of which were discussed in our blog post of 15 November, available here), although there is some limited further clarification. The three points on financial services are copied below with new substantive additions underlined: Continue reading