Brexit & the Financial Sector – A Brief Summary

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With a new EU-UK Trade and Cooperation Agreement now in place, a no-deal Brexit appears to have been avoided by Boris Johnson and his Conservative government. Crucially, the Brexit agreement upholds a tariff-free and quota-free trade deal between the EU and the UK; a mutually beneficial element. Yet, at a closer look, the deal appears to have neglected much of the UK’s economy; namely the services sector which is roughly 80% of the UK’s economy.

Background 

In 2016, when the UK voted to leave the European Union, the initial forecasts of London were exceptionally dire. The City of London, one of the key financial hubs in the world, was expected to lose their superior position due to the restrictions put in place due to Brexit. As the UK left the EU’s single market, London was expected to lose thousands of jobs, approximately 75,000, to other European centres such as Frankfurt and Paris.

Yet, despite these forecasts, the impact of Brexit on London has been somewhat muted so far. In contrast to what was anticipated, several foreign banks including UBS, BNP Paribas and Goldman Sachs have added jobs in London since the Brexit vote. Likewise, the vast majority of other banks maintained their jobs in the City. Nevertheless, whilst the predictions about London’s financial future were very much exaggerated, there has been some major turbulence which will adversely affect business in the City. In particular, the EU-UK Trade and Cooperation Agreement’s lack of mention with regards to the financial services industry has caused some uncertainty and scepticism in terms of the future of the City. 

This article will briefly look at some of the implications of Brexit on Capital Markets, Competition Law and the issue of Equivalence.

Capital Markets Regulation

After Brexit, the UK capital markets will no longer qualify as one of the “regulated markets”. This is one of the key issues facing London as UK issuers will need to negotiate two separate regimes so that the issuers are able to access EEA capital markets and continue to trade within the EU. Notably, following the first trading day of 2021, nearly €6bn of EU share dealing was diverted from the City to facilities in European capitals.

Due to the UK markets losing the status as a ‘regulated market’ under EU law, companies that are currently listed on both EEA and UK markets will no longer possess the ability to appoint a single regulator under the ‘home state’ system. Rather, they will be regulated separately by the EEA and the FCA.

Competition Law

In terms of competition law, leaving the EU has allowed the UK to diverge from the standard EU competition law. A major issue in the immediate short term is how will the CMA cope with the likely increase in workload.

Crucially, transactions which are required to be reviewed and approved no longer benefit from the ‘one-stop-shop’ merger control review under the EU Merger Regulation. As the one-stop-shop principle is discontinued, businesses may need to start adding the UK to their list of merger control filings for an M&A deal. Thus, transactions will potentially face additional scrutiny from the UK’s CMA as the CMA has sole jurisdiction in the UK. As a result, there may be an increase in the risk of inconsistent CMA and European Commission decisions.

Equivalence

Finally, one of the key issues left unresolved is that of ‘equivalence’. This system relies on the UK and the EU judging each other’s regulation and regulatory body to conclude that their supervision to be as good as its own. The EU has not yet granted this for many of the UK’s regulatory bodies.

Yet, ‘equivalence’ has been seen as a very short-term solution as it is only possible in certain financial sectors and the ‘equivalence rulings’ can be revoked by the EU with 30 days’ notice.

Conclusion

Whilst this is merely a brief summary of a few of the key issues that have emerged out of Brexit and the EU-UK Trade and Cooperation Agreement, one can see that, while the UK may have left the EU, the relationship between the two will take much longer to resolve. In particular, a second deal will have to be explicitly negotiated for the financial services sector – officials have briefed journalists that there will be talks taking place in January 2021 with the aim of creating a ‘memorandum of understanding’ by March.

By Bobby Zhu