The UK government and the European Union have struck a trade deal to replace the current deals that end on New Years Eve when the Brexit process is over.
Britain left the European Union on January 31 but retained EU law for a transition period this year. EU law will no longer apply in the UK from January 1. 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 relations with the other 27 EU countries. bloc, its main trading partner.
London’s financial markets have flourished over the past four decades, with the British capital becoming the EU’s main hub for lending, trade and investment.
Now outside the EU, the future size and influence of the city’s financial sector is in question. The financial services sector has the largest trade surplus of any industry in the UK, with 2019 exports of £ 79 billion, or $ 106 billion.
1. Does the agreement include financial services?
The deal ensures continued duty-free trade in goods and details how the two economies will interact on issues ranging from security cooperation to fishing rights, but it’s not entirely clear how it will affect financial services.
The two sides had agreed in the negotiations to discuss financial services separately. The UK government said in a document released Thursday that the agreement includes provisions to support trade in services, including financial and legal services.
‘This will provide many UK service providers with legal guarantees that they will not face trade barriers when selling in the EU and support the mobility of UK professionals who will continue to do business across the EU. EU ”, according to the document.
The deal includes what the UK government has described as ‘revolutionary provisions’ on legal services which allow UK lawyers to advise clients across the EU on UK and public international law, except when members of the EU impose specific limits on this.
From January 1, UK-based financial institutions lose automatic access to the EU’s single market. To serve EU customers next year, UK-based institutions will need to be granted equivalency rights, under which the EU allows them to conduct certain financial activities. Equivalency rights can be withdrawn at short notice. So far the EU has granted temporary equivalency rights to UK clearing houses, which operate between buyers and sellers in transactions and commit to closing the deal even if one of the parties waives it. . London owns a large part of this financial plumbing, which handles billions of dollars in derivative contracts every day.
The parties will continue to discuss how to move forward with granting equivalence and have committed to codifying a framework for regulatory cooperation.
2. How will the deal affect the financial sector?
The deal will improve relations between politicians and regulators on both sides. This will likely have consequences for UK-based financial firms who want the EU to grant more equivalency decisions allowing them access to the single market. On December 9, the International Swaps and Derivatives Association wrote to the EU urging it to grant equivalency for derivatives trading platforms in the UK. The letter was sent after EU regulators announced rules on November 25 that will prevent London-based derivatives traders at EU banks from continuing to operate transparently after the completion of Brexit .
3. What has been the impact of Brexit on UK financial services so far?
EU regulators want some activities currently in London to take place in the EU. Banks and fund managers relocated £ 1.2 trillion of assets from the UK to the EU after the 2016 Brexit vote, and more than 7,500 jobs left the country in the same period, according to the accounting firm Ernst & Young. Since the referendum, 44 companies have announced their intention to recruit locally in the EU for 2,850 existing or newly created positions, according to Ernst & Young. Dublin, Luxembourg, Frankfurt, Paris and Amsterdam are among the main beneficiaries of jobs and assets leaving London.
4. What are people saying?
Following the announcement of the deal on Thursday, the Association for Financial Markets in Europe said in a statement that it was important that the EU and the UK now put urgent decisions in place. equivalence pending to mitigate disruption at the end of the transition period.
Bob Wigley, chairman of UK Finance, the trade association for financial services companies, said there was still work to be done.
“It will be important to build on the foundations of this trade agreement by strengthening arrangements for future trade in financial services,” he said in a statement. “This can be achieved by building on the long-standing regulatory dialogue and supervisory cooperation between UK and EU authorities and reaching agreements on all appropriate equivalence determinations as soon as possible.”
Catherine McGuinness, policy chair of the City of London, the council that manages London’s financial district, said the free trade deal was positive news.
“We hope it can lay the groundwork for a future collaborative partnership,” McGuinness said in a statement. “We also urge the two sides to continue working on other outstanding issues, including the agreement on a framework for regulatory and supervisory cooperation.
Nicolas Mackel, CEO of Luxembourg for Finance, the country’s financial services sector development agency, said: “We should now see a much needed return of goodwill in discussions on financial services. It has never been in anyone’s best interests to make access to capital more difficult in the context of the pandemic crisis we are all facing today.
The Bank of England said earlier this month that most Brexit risks to the UK’s financial stability had been ‘mitigated’, but some market volatility and disruption in financial services could still arise.
5. What happens next?
Politicians, regulators and bankers on both sides of the Channel will fight to shape European financial markets for years to come.
From the UK’s perspective, two paths are possible: trying to stay fully aligned with EU rules in an effort to do more business with the bloc, or going on a more independent path and change. regulations in order to gain more business. globally. Many large institutions would prefer to see more alignment, while Brexit supporters favor divergence.
EU officials are watching the UK closely to detect that their former partner will become too much of a competitor. Robert Ophèle, the chairman of the French financial regulator, this month cited statements by Bank of England Governor Andrew Bailey and UK Treasury chief Rishi Sunak as evidence that the UK could create regulations for compete with the EU.
“In this competitive environment, we also need to build a strong European market and react quickly to developments in financial markets,” Ophèle said in a speech on December 2.
The UK still has a lot to lose and the EU to gain. More than 90% of euro-denominated interest rate derivatives and 84% of foreign exchange transactions in the EU take place in the UK, according to New Financial.
Write to Simon Clark at [email protected]
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