The UK government and the European Union have reached a trade agreement to replace current agreements ending on New Year’s Eve, when the Brexit process is completed.
Britain left the European Union on 31 January, but maintained EU legislation during a transition period this year. EU law will no longer apply in the United Kingdom as of January 1. The UK voted to leave the EU in a June 2016 referendum and politicians spent four tumultuous years trying to reach agreement on new terms for the country’s relationship with the remaining 27 nations in the EU block, its biggest trading partner.
London’s financial markets have prospered over the past four decades, as the UK’s capital has become the EU’s preeminent center for lending, trade and investment.
Now, outside the EU, the future size and influence of the city’s financial sector are at issue. The financial services sector has the largest trade surplus of any industry in the UK, with exports in 2019 of £ 79 billion, equivalent to $ 106 billion.
1. Does the business include financial services?
The agreement guarantees that free trade in goods tariffs 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 this will affect financial services.
Both sides agreed during the negotiations to discuss financial services separately. The UK government said in a document published 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 barriers to trade when selling to the EU and will support the mobility of UK professionals who will continue to do business in the EU,” according to the document.
The agreement includes what the UK government has described as “innovative provisions” on legal services that allow UK lawyers to advise clients across the EU on UK and public international law, except where EU members impose limits specific to that.
As of January 1, UK-based financial institutions lose automatic access to the EU’s single market. In order to serve customers in the EU next year, institutions based in the UK will have to receive equivalence rights, under which the EU allows them to carry out certain financial activities. Equivalence rights can be withdrawn in the short term. So far, the EU has granted temporary equivalence rights to British clearing houses, which operate between buyers and sellers in negotiations and promise to complete the deal even if one side renounces. London has a lot of this financial pipeline, which manages trillions of dollars in derivative contracts every day.
The sides will continue to discuss how to move forward in granting equivalence and have committed to codifying a framework for regulatory cooperation.
2. How will the business affect the financial sector?
The deal will improve relations between politicians and regulators on both sides. This is likely to have consequences for UK-based financial companies, which want the EU to grant more equivalence decisions to enable them to access the single market. On December 9, the International Swaps and Derivatives Association wrote to the EU urging them to grant equivalence to UK derivatives trading venues. The letter was sent after EU regulators announced rules on 25 November that will prevent derivatives traders in London’s EU banks from continuing their business smoothly after the conclusion of Brexit.
3. How has Brexit impacted UK financial services so far?
EU regulators want certain businesses currently conducted in London to take place in the EU. Banks and fund managers reallocated £ 1.2 trillion in UK assets to the EU 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 locally in the EU for 2,850 existing or newly created jobs, according to Ernst & Young. Dublin, Luxembourg, Frankfurt, Paris and Amsterdam are among the main beneficiaries of jobs and assets that leave London.
4. What are people saying?
Following the announcement of the deal on Thursday, the Association for Financial Markets in Europe said in a statement that it was important that the EU and the UK now adopt pending equivalence decisions to mitigate the disruption at the end of the transition period.
Bob Wigley, president of UK Finance, the trade association of financial services companies, said there was more work to be done.
“It will be important to build the foundations of this trade agreement, strengthening the agreements for future trade in financial services,” he said in a statement. “This can be achieved based on long-standing regulatory dialogue and supervisory cooperation between UK and EU authorities and reaching agreements on all appropriate equivalence determinations as soon as possible.”
Catherine McGuinness, president of politics for the City of London, the board that runs London’s financial district, said the free trade agreement is positive news.
“We hope he can lay the groundwork for a future collaborative partnership,” said McGuinness in a statement. “We also urge both sides to continue to work on other outstanding issues, including an agreement on 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 must now see a much-needed return of goodwill to discussions around financial services. It has never been in anyone’s interest to hinder access to capital in the context of the pandemic crisis that we all face.
The Bank of England said earlier this month that most of Brexit’s risks to the UK’s financial stability have been “mitigated”, but there may still be some market volatility and interruption in financial services.
5. What happens next?
Politicians, regulators and bankers on both sides of the English Channel will compete to shape European financial markets in the years to come.
From the UK’s point of view, there are two possible paths ahead: trying to remain fully aligned with EU rules in an attempt to do more business with the bloc, or to seek a more independent path and change the regulations in an attempt to win more business globally. Many large institutions would prefer to see more alignment, while Brexit supporters favor divergence.
EU officials are watching the UK closely for signs that its former partner will become a major competitor. Robert Ophèle, president of France’s financial regulator, this month cited statements by Bank of England governor Andrew Bailey and Rishi Sunak, head of the UK treasury, as evidence that the UK can create regulations to compete with the EU .
“In this competitive context, we also need to build a strong European market and react quickly to developments in financial markets,” said Ophèle in a speech on December 2.
The UK still has a lot to lose and the EU to gain. More than 90% of euro-denominated interest rate derivatives and 84% of foreign currency trading in the EU take place in the United Kingdom, according to New Financial.
Write to Simon Clark at [email protected]
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