Britain left the European Union on Jan. 31 but kept EU legislation during a transition period this year. EU law will no longer apply in the U.K. from Jan. 1. The U.K. 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 nations in the EU bloc, its largest trading partner.
London’s financial markets prospered in the last four decades as the U.K. capital became the pre-eminent EU hub for lending, trading and investing.
Now outside the EU, the future size and influence of the city’s finance industry is in question. The financial services sector has the biggest trade surplus of any industry in the U.K., with exports in 2019 of £79 billion, equivalent to $106 billion.
1. Does the deal include financial services?
The deal ensures tariff-free trade for goods will continue and details how the two economies will interact on issues ranging from security cooperation to fishing rights but it isn’t entirely clear how it will affect financial services.
Both sides had agreed during the negotiations to discuss financial services separately. The U.K. government said in a document published Thursday that the agreement includes provisions to support trade in services, including financial services and legal services.
“This will provide many U.K. service suppliers with legal guarantees that they will not face barriers to trade when selling into the EU and will support the mobility of U.K. professionals who will continue to do business across the EU,” according to the document.
The agreement includes what the U.K. government described as “groundbreaking provisions” on legal services which allow U.K. lawyers to advise clients across the EU on U.K. and public international law, except where EU members place specific limits on this.
From Jan. 1, U.K.-based financial institutions lose automatic access to the EU’s single market. To serve customers in the EU next year, U.K.-based institutions will have to be granted equivalence rights, under which the EU allows them to conduct certain financial activities. Equivalence rights can be withdrawn at short notice. So far the EU has granted temporary equivalence rights to British clearinghouses, which operate between buyers and sellers in trades and pledge to complete the deal even if one side reneges. London has much of this financial plumbing, which manages trillions of dollars of derivatives contracts every day.
The sides will continue discussing how to move forward on granting equivalence and pledged to codify a framework for regulatory cooperation.
2. How will the deal affect the finance industry?
3. How has Brexit impacted U.K. financial services so far?
EU regulators want certain business currently conducted in London to take place in the EU. Banks and fund managers have relocated £1.2 trillion of assets to the EU from the U.K. following the 2016 Brexit vote, and more than 7,500 jobs have left the country in the same period, according to accounting firm Ernst & Young. Since the referendum, 44 firms have announced plans to make local hires in the EU for 2,850 existing or newly created roles, according to Ernst & Young. Dublin, Luxembourg, Frankfurt, Paris and Amsterdam are among the main beneficiaries of jobs and assets moving out of London.
4. What are people saying?
Following the announcement of the agreement Thursday, The Association for Financial Markets in Europe said in a statement that it was important that the EU and the UK now urgently put in place outstanding equivalence decisions to mitigate disruption at the end of the transition period.
Bob Wigley, chair of UK Finance, the trade association for financial services firms, said there was more work to be done.
“It will be important to build on the foundations of this trade deal by strengthening arrangements for future trade in financial services,” he said in a statement. “This can be achieved by building on the longstanding regulatory dialogue and supervisory cooperation between UK and EU authorities and reaching agreements on all appropriate equivalence determinations as soon as possible.”
Catherine McGuinness, the policy chair of the City of London, the council which manages London’s financial district, said the free-trade agreement is positive news.
Nicolas Mackel, CEO of Luxembourg for Finance, the development agency for the country’s financial services industry, said: “We should now see some much needed goodwill return to the discussions around financial services. It has never been in anyone’s interest to make access to capital more difficult in the context of the pandemic crisis we are all currently facing.
The Bank of England said earlier this month that most risks to U.K. financial stability from Brexit have been “mitigated” but some market volatility and disruption to financial services could still occur.
5. What happens next?
Politicians, regulators and bankers on both sides of the English Channel will vie to shape European financial markets for years to come.
From the U.K.’s point of view there are two possible paths ahead: attempting to remain fully aligned with EU rules in a bid to do more business with the bloc, or striking out on a more independent path and changing regulations in a bid to win more business globally. Many large institutions would prefer to see more alignment, while Brexit supporters favor divergence.
EU Officials are watching the U.K. closely for signals that their former partner will become too much of a competitor. Robert Ophèle, the chairman of France’s financial regulator, this month cited statements by Bank of England Gov. Andrew Bailey and Rishi Sunak, the U.K. Treasury chief, as proof the U.K. may create regulation to compete with the EU.
“In this competitive context, we also need to build up a strong European market and to react quickly to how financial markets evolve,” Mr. Ophèle said in a Dec. 2 speech.
The U.K. still has much to lose and the EU to gain. More than 90% of euro-denominated interest-rate derivatives and 84% of foreign-exchange trading in the EU take place in the U.K., according to New Financial.