The UK Government and the European Union have agreed on a trade agreement to replace the current agreements which end on New Year’s Eve, when the Brexit process is completed.
The United Kingdom left the European Union on January 31, but kept EU legislation in a transition period this year. EU law will no longer apply in the UK from 1 January. Britain voted to leave the EU in a referendum in June 2016, and politicians spent four tumultuous years trying to agree new terms for the country’s relationship with the rest of the 27 EU bloc nations, its largest trading partner.
London’s financial markets have thrived over the past four decades as the UK capital has become the EU’s preeminent center for lending, trading and investment.
Now, outside the EU, the size and future influence of the city’s financial industry is being questioned. The financial services sector has the largest trade surplus of any industry in the UK, with exports in 2019 of 79 billion pounds, the equivalent of 106 billion dollars.
1. Does the agreement include financial services?
The agreement guarantees that tariff-free trade will continue and details how the two economies will interact on issues ranging from security cooperation to fishing rights, but it is not entirely clear how it will affect financial services.
Both sides agreed during the negotiations to discuss financial services separately. The British government said in a document released on Thursday that the agreement includes provisions to support trade in services, including financial and legal services.
“This will give many UK service providers legal guarantees that they will not face trade barriers when selling in the EU and will support the mobility of UK professionals who will continue to do business across the EU,” the document said.
The agreement includes what the British government has described as “revolutionary provisions” on legal services that allow British lawyers to advise clients across the EU on British and international public law, unless EU members set specific limits in this regard. .
As of 1 January, UK financial institutions are losing automatic access to the EU’s single market. In order to serve EU customers next year, UK-based institutions will have to be granted equivalence rights, under which the EU allows them to carry out certain financial activities. Equivalence rights can be withdrawn shortly. To date, the EU has granted temporary equivalence rights to British clearing houses, which operate between buyers and sellers in transactions and undertake to close the transaction, even if a party withdraws. London has a large part of this financial facility, which manages billions of dollars in derivative contracts every day.
The Parties will continue to discuss how to move forward in providing equivalence and are committed to codifying a framework for regulatory cooperation.
An agreement between the United Kingdom and the European Union came on Thursday, days before the end of the year, giving the UK significant freedom to move away from EU regulations and sign free trade agreements with other countries. Photo: Paul Grover / Pool
2. How will the business affect the financial industry?
The agreement will improve relations between politicians and regulators on both sides. This is likely to have consequences for UK financial firms that want the EU to grant more equivalence decisions that allow them access to the single market. On 9 December, the International Swap and Derivatives Association wrote to the EU urging them to grant the equivalence of UK derivatives trading venues. The letter was sent after EU regulators announced rules on November 25 that would prevent traders with financial derivatives from London from EU banks to continue operating smoothly after the end of Brexit.
3. How has Brexit affected financial services in the UK so far?
EU regulators want some of London’s current business to take place in the EU. Banks and fund managers moved 1.2 trillion pounds of assets to the EU from the UK after the 2016 Brexit vote, and more than 7,500 jobs left the country in the same period, according to accounting firm Ernst & Young. Since the referendum, 44 companies have announced plans to hire local people in the EU for 2,850 existing or newly created roles, according to Ernst & Young. Dublin, Luxembourg, Frankfurt, Paris and Amsterdam are among the main beneficiaries of jobs and assets leaving London.
4. What do people say?
Following the announcement of the agreement on Thursday, the European Financial Markets Association said in a statement that it was important for the EU and the UK to take urgent equivalence decisions as a matter of urgency in order to alleviate the disruptions at the end of the transition period.
Bob Wigley, president of UK Finance, the trade association for financial services companies, said there was still a lot of work to be done.
“It will be important to build on the basis of this trade agreement by strengthening agreements for future trade in financial services,” he said in a statement. “This can be achieved by strengthening the long-term regulatory dialogue and supervisory cooperation between the UK and EU authorities and reaching agreements on all appropriate determinations of equivalence as soon as possible.”
Catherine McGuinness, political chairwoman of the City of London, London’s financial district board, said the free trade agreement was good news.
“We hope it can lay the groundwork for a future partnership,” Ms McGuinness said in a statement. “We also urge both sides to continue working on other unresolved issues, including the agreement of a framework for regulatory and supervisory cooperation.
Nicolas Mackel, CEO of Luxembourg for Finance, the country’s development agency for the financial services industry, said: “We should now see the much-needed goodwill to return to discussions on financial services. It has never been in anyone’s interest to hinder access to capital in the context of the pandemic crisis we are all facing today.
The Bank of England said earlier this month that most risks to Britain’s Brexit financial stability had been “mitigated”, but there could still be some market volatility and disruption to financial services.
5. What happens next?
Politicians, regulators and bankers on both sides of the English Channel will struggle to shape European financial markets for years to come.
From the UK’s point of view, there are two possible ways: to try to stay fully aligned with EU rules in trying to do more business with the bloc, or to enter a more independent path and change regulations in an attempt to to win more business globally. Many large institutions would prefer to see more alignments, while Brexit supporters favor divergence.
EU officials are watching Britain closely for signs that their former partner will become too big a competitor. Robert Ophèle, chairman of the French financial regulator, quoted the bank’s governor of England, Andrew Bailey, and Rishi Sunak, head of the UK treasury, as saying that Britain could create regulations to compete with the EU.
“In this competitive context, we must also build a strong European market and react quickly to the evolution of financial markets,” Ophèle said in a speech on 2 December.
Britain has a lot to lose and the EU to gain. According to New Financial, over 90% of euro-denominated interest rate derivatives and 84% of EU foreign exchange transactions take place in the UK.
Write to Simon Clark the [email protected]
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