By Anca Thomson is a specialist corporate and commercial lawyer at Excello Law.

Brexit has created uncertainty and speculation across the UK financial services industry since before the 2016 referendum was held. Now that Brexit is finally a reality, the opportunities it could presents are beginning to come into view.

The EU-UK Trade and Cooperation Agreement (TCA) which was signed on Christmas Eve 2020 primarily focused on easing trade in goods. Services were only lightly touched upon in the agreement.

As regards financial services, negotiations are yet to start in earnest. The TCA does not go even as far as the EU-Canada trade agreement on financial services, but it does allow for mutual market access by way of establishment, such as the creation of branches or subsidiaries in the other jurisdiction.

The TCA does offer some comfort for UK services providers who wish to continue to access the EU market. The UK government’s summary of the TCA states that the agreement “includes well-established provisions on cross-border trade in services and investment that will secure continued market access across a broad range of sectors, including professional and business services, financial services and transport services, and will support new and continued foreign direct investment.”

There are a number of specific TCA provisions which will help to underpin the UK’s financial services industry’s access to the EU market. The UK government summary document notes that these provisions will ensure that “service suppliers and investors do not face limitations such as economic needs tests, restrictions on corporate form and foreign equity caps”. The agreement on “non-discriminatory treatment between UK and EU service suppliers” is  also welcome, as is a “local presence rule” which will help prevent cross border services being inhibited by establishment requirements.

Financial services are, of course, highly regulated. Until now, the EU’s passporting regime enabled many services to be provided across the EU, if they were approved by one member state regulator. UK financial services firms are still awaiting clarity as to the regime that will ultimately govern their activities into the EU. An EU-UK memorandum of understanding on financial services is scheduled to be agreed by the end of March 2021.

Many of the challenges faced by financial services companies as Brexit unfolded have already been dealt with by redomiciling legal entities such as companies holding funds into EU jurisdictions. In the case of funds such as UCITS, many funds which are managed from London were already domiciled in popular EU domiciles such as Luxembourg or Ireland. However, the end of the EU’s passporting regime creates difficulty for the provision of many other financial services into the EU.

Cross-border financial services are typically governed by trade agreements, equivalence decisions or on WTO terms. The European Commission has identified equivalence decisions as forming a key part of its wider concept of EU-UK “pillars of cooperation” in the post-Brexit world.

In November 2020, Chancellor Sunak also made clear that equivalence is the UK’s primary strategy for replacing the EU passporting regime, saying that: “Our first task as we write this new chapter for financial services is to give certainty on our approach to regulation … One of the central mechanisms for managing our cross-border financial services activity with the EU and beyond, is equivalence. I remain firmly of the view that it is in both the UK and EU’s interests to reach a comprehensive set of mutual decisions on equivalence.” However, one limitation of equivalence decisions is that retail financial services such as lending and taking deposits are excluded.

Relying on unilateral equivalence decisions carries risks, since the EU can withdraw equivalence with just 30 days’ notice. However, by establishing close cross-border consultation as to any proposed new rules, and by giving clear advance notice of any regulatory changes, any potential disruption can be minimised. It is hoped that the memorandum of understanding will set out mechanisms and expectations in this regard.

Financial services equivalence decisions did not form part of the UK-EU trade negotiations per se. The EU-UK 2019 political declaration which set out the framework for the future EU-UK relationship set out a commitment to finalise equivalence decisions by mid-2020. Unfortunately, this deadline was not met. EU passporting agreements have now come to an end. The TCA does however commit the EU and UK to have committed to agreeing a  Memorandum of Understanding as regards financial services regulation, financial stability and equivalence by the end of March 2021. Given the recent tensions erupting between the EU and the UK over coronavirus vaccines, it’s clear that the mood music for these important negotiations has not improved.

Indeed, the EU has seemed coy about making equivalence decisions thus far. By contrast, the British government has been generous in announcing a number of important equivalence decisions for EEA financial services companies operating in the UK in certain sectors. These include credit ratings agencies and those operating in derivatives trading. Mr Sunak has said that UK policy is to allow for equivalence where so doing is in the interests of the wider UK economy. By contrast, the EU has so far been less forthcoming in terms of its equivalence decisions. Those which it has made have been time limited, such as permitting derivatives clearing for 18 months and allowing the settling Irish securities for just 6 months.

UK based clearing houses Europe have long dominated the EU market. It is clear that the EU intends to end such dominance. For example, the EU is calling this 18-month equivalence decision both temporary and final. Gilles Hervé, policy officer at the European Commission has unambiguously said that “this is the last one. This is the last 18 months that we are providing the industry”.

In a further signal that the EU intends to permanently shift financial services business away from the UK, it has recently offered the US clearing houses an equivalence deal – but without any time limit. The EU’s commissioner for financial services, Mairead McGuinness, called this decision “a significant first step in the process of recognising US [clearing houses] registered with the US Securities and Exchange Commission in the European Union.”

Despite such evidence of the EU’s desire to move away from reliance upon UK financial services, the fact that the TCA was ultimately reached gives cause for hope that the way similarly can be paved for a reasonable arrangement with the EU in terms of access for financial services. Even where a favourable EU equivalence decision is not forthcoming, many of the existing financial services can be carried out by UK providers by using subsidiaries or corporate entities in the EU, which can then obtain EU passporting rights.

Equivalence decisions do offer a more efficient way to keep services flowing across the EU, but the absence of such decisions is not insurmountable. Where a UK company solely focuses on trading into a particular EU member state, it need only comply with the requirements the regulator in that member state.

Chancellor Sunak has made clear that financial services are central to the UK’s overall post-Brexit and post-Covid economic strategy. In November 2020, he said that “Financial services have been fundamental to Britain’s economic strength for centuries. And they remain fundamental today. The vigour and creativity of this industry adds over £130 billion of value to the UK economy”.

Mr Sunak also noted that financial services employs over a million people across the UK, and he challenged what he called the “myth that ‘financial services’ and the ‘City of London’ are synonyms. Two thirds of the people employed in financial and professional services work outside London, in places like Edinburgh, Leeds, Durham, Cardiff and Belfast. And around half of all financial services exports come from outside London too with the North and Midlands alone exporting as much as the entire financial services industry of France.”

The success of the UK’s post-Brexit financial services industry therefore plays directly into important political objectives for the UK government. If it can be seen to successfully develop an industry which creates jobs and prosperity in northern England, that could underpin the Conservative’s recent electoral success in that region. If the success of Edinburgh’s financial services industry is seen as being intrinsically linked to that of London, that provides an argument against Scottish independence.

Of course, a positive of being outside the EU is that the UK can now more easily reach trade agreements around the world. The UK has its sights set on achieving close general trade agreements with the US, China, India and other major nations. It has already concluded agreements with a number of significant economies, such as Japan, Canada and Mexico. Many of these initial agreements could yet go deeper.

In order to facilitate the export of UK financial services beyond the EU, the government has already been actively involved in negotiating bilateral services agreements with a wide range of countries. It can also push for equivalence decisions to facilitate access. For example, Switzerland and the UK initially signed a general agreement focused on financial services, in order to open discussions on achieving an outcomes-based mutual recognition agreement to reduce friction and costs. This has a particular focus on financial services including insurance, banking, asset management and capital markets. On 4 December 2020, this initial agreement was built upon by a Services Mobility Agreement.

We can therefore expect trade agreements to be built piecemeal, and to evolve and expand as fresh agreement is reached on new areas of co-operation and trade. For example, the UK and Brazil have also signed an agreement specifically relating to financial services and negotiations are underway around the world.

It is clear that the process of opening up new markets for UK financial services is already well underway. It is far easier for the UK to reach a trade deal than it is for the EU. This is because the EU’s trade agreements must be unanimously agreed, and it can be difficult to find an agreement which does not cut across the interests of one of the EU27 nations or their regions. For example, the 2016 EU-Canada trade agreement was very nearly blocked by opposition from the Belgian region of Wallonia.

Although the UK will is committed to maintaining high regulatory standards, it may be that the UK’s financial services regulatory regime will be less bureaucratic than its EU counterpart and therefore better able to adapt to new and emerging technologies and areas such as digital currency, fintech and cryptocurrency. Chancellor Sunak has said that he sees the potential benefits of stablecoins and other digital currencies, and that the government will seek to constructively regulate for these payment methods. The UK is also actively considering issuing its own digital currency, backed by the Bank of England.

The UK’s guidance and principles-based regime is also argued to be inherently more flexible and accommodating to new and emergent technologies. It may be that the UK’s can create a regulatory and taxation regime which is very attractive to innovative fintech and financial services companies. Revolut’s recent application for a UK banking licence suggests that fintech firms do see real opportunity in the UK.

The City of London commissioned E&Y to carry out detailed research into the position of London’s fintech industry. The 2020 report found that “The UK remains a global FinTech capital. We estimate that the UK FinTech sector represented c.£11.0b in revenue in 2019, up from c.£6.6b in 2015, and now accounts for c.8% of total financial services output. In the last five years, the UK FinTech sector has moved mainstream, having inspired and stimulated innovation in broader financial services and technology sectors.”

The report  also found that key strengths of the UK’s fintech ecosystem included access to talent, capital and strong demand. The report noted that “the UK policy environment is more mature and progressive than other in-scope markets, with the FCA’s explicit competition mandate appearing to be a source of differentiation. It remains highly supportive of innovation, with many markets looking to the UK for world-class regulatory and infrastructure initiatives (e.g., the FCA’s regulatory sandbox and the Bank of England’s New Bank Start-up Unit (NBSU) and open banking).”

The Institute for Financial Services Zug, which is part of the Lucerne University of Applied Sciences, conducts an annual ranking of the cities with the most supportive FinTech ecosystems, capable of driving entrepreneurship and innovation in the sector. While London regularly makes the top-10, and did so in 2020, the only other European city in the top-10 is Berlin. The EU often tends to move slowly and conservatively in regulating new technologies, although it already has in place significant plans for fintech and blockchain regulation. Yet the UK announced its aim to become a leading fintech centre back in 2014. The imminent publication of the government’s Fintech Strategic Review will accelerate plans for growth. For example, it will look at new policy measures, including visas for talent, investment, and ways to link up the 10 UK fintech  clusters it has identified.

The UKs financial services and fintech firms and the global cryptocurrency markets know how to thrive on risk. Many firms embrace market flux as providing an opportunity to innovate and grow.

The UK is now clearly focused on positioning itself as a global financial services and fintech centre. The Financial Conduct Authority recognises this and wants to encourage such innovation. If the UK regulators create a positive regulatory environment which attracts inward investment in high-growth financial services sectors, while also widening and deepening its access internationally, the future is bright for the UK financial services industry.