The Transition Period for the UK's withdrawal from the EU ended on 31 December 2020.

The future EU-UK Trade and Co-operation Agreement (PDF 12.1 MB) makes limited mention of financial services, but the EU and the UK have committed (PDF 711 KB) to agree a way forward by end-March 2021.

The likelihood of financial services being included more broadly in the agreement (especially for retail markets) was always very low, and most firms had planned on this basis, but critical issues remain unresolved or uncertain, including:

  • Most EU decisions on the “equivalence” of the UK's current financial services regulation and supervision, and some UK decisions on the EU's framework
  • The availability of run-off regimes for contracts entered into prior to the end of 2020
  • The transfer of personal data, which is covered by temporary arrangements for up to six months
  • The need (or not) for work permits

Firms and investment funds can no longer use the EU passports across the new EU-UK border, in either direction. Equivalence is not provided for in all legislation and does not replace the loss of passports, but it can ease the impact of the new EU-UK border in certain areas. For wholesale markets and professional customers, the critical questions are if and how quickly the full set of equivalence judgements will be confirmed (by both the EU and the UK) and what national arrangements are or might be put in place.

It is for each EU/EEA member state to decide whether and under what conditions it will permit third-country entities to provide financial services to retail customers in their own jurisdiction. It is also for each member state to decide what constitutes new business and whether it allows existing client relationships to continue to be serviced.

On 13 January, ESMA issued a reminder to firms about the use of “reverse solicitation” under MiFID II, highlighting “questionable practices” by firms, including the use of general clauses in terms of business and online “I agree” pop-up boxes. Where a third-country firm solicits clients or potential clients in the EU, or where it promotes or advertises investment services or activities together with ancillary services, this should not be deemed as a service provided at the own exclusive initiative of the client, so does not fall under the reverse solicitation  provision.

Announcements to date

By the EU on the UK:

  • A time-limited (18 months) equivalence decision for derivatives clearing

  • A time-limited (six months) equivalence decision for settling EU securities in UK Central Securities Depositories

By the EU on EU/EEA member states:

  • Prospectus Regulation and Transparency Directive: EU/EEA securities offered to the UK public or admitted to trading in the UK can use their EU/EEA prospectuses and disclosures

  • EMIR: transactions with an EU/EEA entity in the same group qualify as intragroup exposures in the credit valuation adjustment (CVA) calculation, and derivatives traded on EU/EEA regulated exchanges continue to be treated as exchange-traded rather than OTC

  • Capital Requirements Regulation: UK firms will not be subject to increased capital requirements as a result of their EU/EEA exposures

  • Solvency II Regulation: on reinsurance, local solvency rules and group supervision

  • Central Securities Depositories Regulation: EU/EEA CSDs can be recognised and continue to service UK securities

  • Benchmark Regulation: EU/EEA administrators can provide benchmarks to UK-supervised entities

  • Credit Rating Agencies Regulation: non-systemic, EU/EEA registered/authorised CRAs can be certified in the UK and UK-registered CRAs can endorse credit ratings issued by affiliated EU CRAs

  • Short Selling Regulation: EU/EEA market-makers can use the exemption that disapplies certain short selling restrictions and reporting requirements

  • EU/EEA Central Counterparties (CCPs) can be recognised by the Bank of England, so that UK firms can continue to use them

The European Commission will review its equivalence decisions on the UK if the EU introduces rule changes that the UK does not implement, or if the UK decides to change its rules, where those rules are material to the equivalence judgements. Therefore, it is uncertain how long any EU equivalence decisions on the UK will remain in place.

The ongoing EU-UK negotiations on the equivalence framework are also highlighting the differences between the two approaches to assessment. In recent years, the EU's process for assessing third countries has moved towards a line-by-line examination of the third country's regulatory regime.  The UK's approach is focused on equivalent investor protection outcomes rather than requiring similar rules.

Moreover, looking forward, some member states have suggested that the EU's current use of equivalence (whereby it depends on the rules of and supervision by a third-country regulator) should be replaced by a requirement for third-country firms to register in the EU and to comply with EU rules.

Meanwhile, based on advice from the FCA, HM Treasury has issued draft law that will deem Switzerland's trading venues equivalent under UK MiFIR. It is expected to enter into force in February 2021. UK firms will then be able to use Swiss exchanges and trading venues to fulfil the UK share trading obligation.

National provisions

Ahead of further EU equivalence announcements on the UK, some national regulators have issued temporary equivalence decisions on the UK, such as the CONSOB’s six-month decree for UK banks and investment firms operating in Italy and the Luxembourg's CSSF announcement in relation to MiFIR. More generally, a few member states have put in place national temporary arrangements to smooth the ending of the Transition Period, but of more limited scope and duration than the UK's provisions.

The UK's Temporary Permissions Regime (TPR) allows registered EU/EEA firms and investment funds to continue to operate in the UK for up to three years on the same basis as when the UK was a member of the EU. Firms and funds that registered under the regime by end-2020 are expected to apply for UK authorisation or registration before the regime ends.

The UK's Financial Services Contract Regime (FSCR) ensures that existing contractual obligations between EU/EEA and UK counterparts can be fulfilled for up to five years (15 years for insurance contracts), even if they are outside the TPR, but provided it does not amount to new business. It allows EU/EEA firms to run-off contracts made prior to end-2020 with UK individuals or legal entities. Firms that did not submit a TPR notification, or that are unsuccessful in securing full UK authorisation through the TPR route, automatically enter the FSCR, but have to take certain actions, including compliance with UK rules that did not previously apply to them.

The process of onshoring EU regulation means that there are some areas where the UK requirements have changed. To help firms adapt to their new requirements, the UK financial regulators have the power to make transitional provisions to rules, for a temporary period — the Temporary Transitional Power (TTP). The regulators are making broad use of this power up to 31 March 2022.

After the end of the TPR, EU/EEA investment funds would be dependent on the UK's national private placement regime to market into the UK or to register with the FCA, which requires each fund to be considered on a case-by-case basis. The proposed Offshore Funds Regime (OFR) will ease this process. The FCA will consider third countries' fund regimes and judge whether they are equivalent. Funds from countries that receive positive judgements will be able to register with the FCA via a simplified process.

Other impacts

Bank depositors may find they are now covered by a different deposit protection scheme or, if the deposit is held by a branch, not covered.

For both UK and EEA banks and insurers, there are implications for the calculation of capital requirements, which regulator is lead supervisor and whether PRA approvals for models and exemptions will be recognised. Also, the PRA no longer has the same degree of access to the College of Supervisor arrangements. Many banks and insurers had already adjusted their capital positions to prepare for a non-equivalence scenario, but the practical impacts of the change in lead supervisor and supervisory college arrangement will only be seen over time as issues arise.

Both EU and UK firms should also factor into their thinking the ongoing EU debate on the focus of national super. It is clear that EU entities that delegate key activities to third-country firms will need to have increased in-house skills and more experienced staff than may previously have been permitted.

Finally, as businesses and transaction flows adjust to the new border, the focus of national supervisors is also shifting. For example, the Dutch AFM's 2021 regulatory agenda notes that due to an increasing number of supervised entities and a marked increase in order and transaction data, its remit in capital markets supervisory remit is growing.