The UK government and the European Union have reached a trade deal to replace the current agreements that will end on New Year’s Eve when the Brexit process ends.
Britain left the European Union on 31 January, but this year maintained EU legislation for a transitional period. EU law will no longer apply in the UK from 1 January. The UK voted to leave the EU in a June 2016 referendum and politicians have spent four tumultuous years trying to agree new terms for the country’s relationship with the remaining 27 EU nations. blog, your largest business partner.
London’s financial markets have thrived in the last four decades as the British capital became the EU’s hub for lending, trade and investment.
Now outside the EU, the size and future influence of the city’s financial industry is questioned. 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 agreement include financial services?
The agreement guarantees that free trade in 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 it will affect financial services.
Both sides had agreed during the talks to talk about financial services separately. The UK government said in a document released on Thursday that the agreement includes provisions to support trade in services, including financial services and legal services.
“This will provide many British service providers with legal guarantees that they will not face trade barriers when selling in the EU and will support the mobility of UK professionals who will continue to do business across the EU,” according to the document.
The agreement includes what the UK government called “innovative provisions” on legal services that allow British lawyers to advise clients across the EU on public international law and the UK, unless members of the EU set specific limits.
As of 1 January, UK-based financial institutions are losing automatic access to the EU single market. To serve EU customers next year, UK-based institutions will have to grant equivalence rights, according to which the EU will allow them to carry out certain financial activities. Equivalence rights may be withdrawn at short notice. To date, the EU has granted temporary equivalence rights to British exchange centers, which operate between buyers and sellers in business and undertake to complete the agreement even if a party renounces it. London has much of this financial plumbing, which manages billions of dollars in derivative contracts every day.
The parties will continue to discuss how to move forward in granting equivalence and pledged to codify a framework for regulatory cooperation.
An agreement between the UK and the European Union was reached on Thursday, days before the year-end deadline, which gave Britain significant freedom to deviate from EU rules and sign agreements. free trade with other countries. Photo: Paul Grover / Pool
2. How will the agreement affect the financial industry?
The agreement will improve relations between politicians and regulators on both sides. This is likely to have consequences for UK-based financial firms that want the EU to grant more equivalence decisions that allow them access to the single market. On 9 December, the International Swaps and Derivatives Association wrote to the EU urging them to grant equivalence for UK derivatives trading sites. The letter was sent after EU regulators announced rules on November 25 that would prevent London-based derivative traders from EU banks from continuing their business smoothly after Brexit was completed.
3. How has Brexit affected UK financial services so far?
EU regulators want certain businesses currently conducted in London to be developed in the EU. Banks and fund managers have moved £ 1.2 trillion in assets to the EU from the UK following the 2016 Brexit vote, and more than 7,500 jobs have left the country in the same period, according to the accounting firm Ernst & Young. Since the referendum, 44 companies have announced plans to hire locals in the EU for 2,850 existing or newly created functions, according to Ernst & Young. Dublin, Luxembourg, Frankfurt, Paris and Amsterdam are among the main beneficiaries of jobs and assets coming out of London.
4. What do people say?
Following the announcement of the agreement on Thursday, the Association for Financial Markets in Europe said in a statement that it was important for the EU and the UK to urgently take pending equivalence decisions to mitigate disruptions in the end. of the transition period.
Bob Wigley, president of UK Finance, the trade association for financial services companies, said there was more work to be done.
“It will be important to build on the foundations of this trade agreement by strengthening the agreements for future trade in financial services,” it said in a statement. “This can be achieved on the basis of long-term regulatory dialogue and supervisory cooperation between UK and EU authorities and reaching agreements on all appropriate equivalence determinations as soon as possible.”
Catherine McGuinness, political chair of the City of London, the council that manages London’s financial district, said the free trade agreement is positive news.
“We hope you can lay the groundwork for a future collaborative partnership,” Ms. McGuinness in a statement. “We also urge both parties to continue working on other outstanding issues, including the agreement of a framework for regulatory and supervisory cooperation.
Nicolas Mackel, CEO of Luxembourg for Finance, the country’s financial services industry development agency, said: “We should now see much-needed goodwill to return to discussions on financial services. It has never been in the interest of no one to hinder access to capital in the context of the pandemic crisis we are currently experiencing.
The Bank of England said earlier this month that most of the UK’s risks to financial stability from Brexit had been “mitigated”, but there could still be some market volatility and disruption. of financial services.
5. What happens next?
Politicians, regulators and bankers on both sides of the English Channel will fight to shape European financial markets for years to come.
From the UK’s point of view, there are two possible paths ahead: trying to stay fully aligned with EU rules to try to do more business with the bloc or take a more independent path and change regulations to try to win more companies. globally. Many large institutions prefer to see more alignment, while Brexit supporters favor divergence.
EU officials are closely watching the UK to see if its former partner will become an excessive competitor. Robert Ophèle, the president of the French financial regulator, quoted this month the statements of the governor of the Bank of England Andrew Bailey and Rishi Sunak, the head of the UK Treasury, as proof that the UK can create regulations to compete with the EU.
“In this competitive context, we must also build a strong European market and react quickly to the evolution of financial markets,” Ophèle said in a December 2 speech.
The UK still has a lot to lose and the EU to gain. According to New Financial, more than 90% of euro-denominated interest rate derivatives and 84% of foreign exchange trading in the EU take place in the UK.
Write to Simon Clark to [email protected]
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