This week's vote in the House of Commons giving the Prime Minister approval to trigger Article 50 followed the publication of a white paper (paper), providing us with slightly more detail about the Government's plan for the UK's withdrawal from the EU. Mrs May's speech on 17 January cited certainty and clarity as the first of 12 objectives for the withdrawal process, which are reiterated in the paper. While certainty and clarity are still some distance away, this article examines the implications of the speech and the paper for the financial services industry as Britain navigates its departure from the EU.
The Prime Minister's speech
In her speech on 17 January the Prime Minister made specific reference to the financial services sector. In particular Mrs May noted that the Brexit agreement may need to incorporate certain elements of the current single market, including, for example, the freedom to provide financial services across national borders. This aspirational statement seems somewhat at odds with her widely publicised declaration that Britain will not seek to retain membership of the single market. She also set out the anticipated "phased approach" which would stagger implementation of the Brexit agreement, to allow businesses time to prepare for the transition.
This acknowledgement of the financial services sector's position in relation to the single market hopefully indicates that the Government appreciates the industry's concern to maintain the UK's competitive advantage. In order to retain this advantage, the Government will need to consider carefully how financial services will be provided across national borders (a detail absent from the Prime Minister's speech). As well as trade considerations, the Government will need to ensure that the UK remains an attractive destination for skilled workers and that current EU and EEA employees in the UK can be confident that they may continue working here.
The phased approach will be particularly relevant for the financial services sector because of the overlap between EU and UK law. Market participants will have time to adapt as required by the finalised agreement and any interim arrangements which will be in place on expiry of the two-year period after Article 50 is triggered. The requirement for orderly transition arrangements has been commented on by industry bodies. In particular the British Bankers Association (BBA) has highlighted that proper transitional agreements "would minimise unnecessary disruption" and the risk that firms may make premature and costly decisions regarding their business (for example, in relation to branch locations). An orderly transitional agreement could help the UK retain business and jobs which is clearly in the country's best interest.
The white paper
The paper unsurprisingly did not go significantly beyond Mrs May's speech. Financial services was cited as an example of a "highly integrated" sector where mutual cooperation would clearly serve the interests of both the EU and the UK. The paper also spoke of London's pre-eminence as a global financial centre and its leadership in the areas of investment banking, asset management and FinTech, underlining that a good deal was clearly in the interests of both the UK and the EU.
The paper did not expand on any plans for the treatment of UK financial products and services being offered to the EU (and vice versa). However, the paper did note the pre-existing regimes which allow the passporting and equivalence of services and products, which may be used as a starting point for negotiations. The paper picked up on information provided by the FCA last year that while there are approximately 5000 UK firms using passports to provide financial services across the EU, there are more than 8000 European firms using passports to provide such services to the UK. The paper also noted that negotiations for the cross-border provision of financial services are different to other business and commercial concerns, as "unlike other trade negotiations, this is not about bringing two divergent systems together."
In terms of immigration, which is so important for the recruitment and retention of the best people in the financial services sector, the paper only confirmed the Government's aim of an envisaged immigration system which will control numbers but still encourage the best talent to seek employment in the UK.
Other industry concerns
The sector, like the Government, is keen to preserve the UK as a leader in financial services. It is therefore important for the Government to establish a robust, reciprocal regime with the EU and to ensure transitional measures are strong enough to support the phased approach to implementation.
Ideally the EU would continue to recognise UK financial services and products as meeting EU regulatory requirements. Arguably, negotiating equivalence for the investment management sector is more straightforward, where the UK and EU are perhaps more easily synchronised (thanks to passporting and treatment of third-country services). Negotiating similarly for commercial banking and insurance will need further consideration. The UK will also need to think carefully about how EU law and judgments can be applied in the UK so as to ensure consistent interpretation and enable the greatest reciprocity, and the paper considers options such as arbitration panels.
The UK regulatory regime has various features which operate independently of EU law, such as FSMA, overseas exemptions and the rules on financial promotions. The Government will need to decide whether or not European market participants should still be able to benefit from such exemptions which until now have only applied to non-EEA countries. Furthermore, the Government will need to consider whether European market participants should be treated any differently than those from other jurisdictions. This will of course depend on how negotiations proceed as to the treatment of UK market participants by the EU.
As the financial services industry holds a unique position in the UK it is important that the Government prioritise negotiations in this area. Over the next two years there will be plenty of bureaucratic and political hurdles to overcome. The Government should not forget to take advantage of opportunities further afield and in other fast growing markets in its keenness to appease the EU.
Next steps and conclusion
It appears that the Government has grasped (at least to some extent) how significant the Brexit negotiations will be for the financial services sector. Indeed, the Prime Minister acknowledges the need for the city to be able to provide financial services across national borders and appears to want to retain elements of the single market arrangements for the financial services industry. It may well be that she is relying on the interconnectedness of the European financial services system and that the city is the hub for European clearing. It is unlikely that any other European city could provide the financial infrastructure to support European financial services within the Brexit timeframe. It is to be hoped that Mrs May plays this trump card well and achieves her aspiration set out in the paper to the "freest possible trade in financial services between the UK and EU member states" so that the UK retains its status as a pre-eminent financial services centre.
We set out below key upcoming dates in the Brexit procedure. We will be monitoring developments closely and will update our clients and contacts in our briefings and at our seminars.
• 9 February 2017: House of Lords debate on the EU Committee report "Brexit: Financial Services"
• 20 February 2017: Bill considered by House of Lords
• By end of March 2017: Article 50 triggered
• April 2017: Earliest likeliest date formal Brexit negotiations with the EU will begin
If you require further information on anything covered in this briefing please contact Louise Bralsford([email protected]) or your usual contact at the firm on 020 3375 7000.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, February 2017