28.12.2020 | Alexander Nölle

Aufsichtsrecht & Meldewesen

Brexit Trade and Cooperation Agreement

The EU-UK Trade and Cooperation Agreement or:
Where is the difference between Christmas market and financial market?

Despite CoViD-19 and despite a little Christmas-hangover you may have asked yourself what the EU-UK Trade and Cooperation Agreement can tell you about the future of the financial sector and a potential Level Playing Field?

To cut a long story short: not very much, to put it nicely

When in 2016 a very thin majority of 51,89 % of the British people (at least of those people participated in the referendum) voted to leave the EU, they were triggered by a couple of populists and their campaigns.
Those campaigners addressed the fishing industry, the health system or how to deal with immigration. To win majorities financial markets have not been put on the top of the agendas of the populists.

However, from an economic perspective Brexit is more than about fishing quotas and intellectual property, especially when it comes to financial markets.

Maybe this was the reason, why in 2017 Danièle Nouy, Chair of the Supervisory Board of the ECB, gave a speech about regulatory arbitrage (reference #1):

“Here in Europe, cross-jurisdiction arbitrage has become even more of an issue since the United Kingdom decided to leave the EU. Post-Brexit, UK banks will need to set up entities in Europe, and most likely in the euro area, in order to retain access to the Single Market. In this context, we will need to keep a close eye on back‑to‑back booking, for instance.
And that’s not all. While some UK banks might choose to set up subsidiaries in the euro area, others might set up branches. And such third-country branches would not be supervised by the ECB; they would be supervised by national authorities, with national rules being applied. A similar issue would arise if UK banks were to set up investment firms.”

Basel III was made in response to the financial crisis of 2007-09 to strengthen the regulation, supervision and risk management of banks. In Europe (and so in the UK) national prudential rules have been largely replaced by the Capital Requirements Regulation (CRR) on the one hand and the Capital Requirements Directive (CRD) on the other hand.

So, If you look into the current EU-UK Trade and Cooperation Agreement (reference #2) you will not find anything specific regarding a level playing field for financial services.

But as part of the corresponding Q&A (reference #3) to the Agreement you can find this:

“The Agreement does not include any elements pertaining to equivalence frameworks for financial services. These are unilateral decisions of each party and are not subject to negotiation.
The Agreement commits both parties to maintain their markets open for operators from the other Party seeking to supply services through establishment.

The parties also commit to ensuring that internationally agreed standards in the financial services sector are implemented and applied in their territories.

Both parties preserve their right to adopt or maintain measures for prudential reasons (‘prudential carve-out'), including in order to preserve financial stability and the integrity of financial markets. The parties will also aim to agree by March 2021 a Memorandum of Understanding establishing a framework for regulatory cooperation on financial services.”

To wrap it up:
After Brexit, the EU will mainly pour out Glühwein on Christmas markets. But especially on financial markets you always have to keep an eye on the one who tries to add a shot of Jägermeister into your mug.

 

 

Sources:

[1] Gaming the rules or ruling the game? – How to deal with regulatory arbitrage

[2] https://ec.europa.eu/info/european-union-and-united-kingdom-forging-new-partnership/future-partnership/draft-eu-uk-trade-and-cooperation-agreement_en

[3] https://ec.europa.eu/commission/presscorner/detail/en/qanda_20_2532