A New European Financial Services Landscape for a New Year?

January 07, 2021

Readers scanning the UK/EU trade deal on Christmas Eve will have looked in vain for a meaningful section on financial services. Instead, the UK asset management industry has been presented with something that looks very much like a hard Brexit, albeit with the promise of more work to come.

This OnPoint summarises the current legislative state of play and the outlook for UK and EU firms and clients continuing to do business with each other.

Britain’s Prime Minister, Boris Johnson, secured victory in the December 2019 general election with a promise to “get Brexit done”. The UK duly left the European Union (EU) on 31 January 2020, and the UK and the EU entered a ‘transition period’ designed to maintain the regulatory status quo between the UK and the EU until 31 December 2020 (the Transition Period). On 24 December 2020, the EU and the UK agreed the terms of a Trade and Cooperation Agreement1 (the TCA), but what does this mean in practice for the financial services sector?  Do the recently released Memoranda of Understanding provide any greater clarity for the financial services industry?

1.      What was agreed?

Broadly speaking, the TCA establishes a customs and duty-free border between the UK and the EU together with a framework for encouraging trade between the UK and the EU, based on the concept of a level playing field with regard to matters such as monopolies, subsidies, and protectionism of various sorts.

In the EU’s words, the TCA “covers not just trade in goods and services, but also a broad range of other areas in the EU's interest, such as investment, competition, State aid, tax transparency, air and road transport, energy and sustainability, fisheries, data protection, and social security coordination”.2

The UK and the EU were – unsurprisingly – only able to agree terms at a very late stage before the end of the Transition Period, which means it was not possible to complete certain legislative procedures necessary for the TCA to enter fully into force on 1 January 2021. Therefore, the terms of the TCA will apply on a provisional basis pending completion of those procedures.

The formal process of ratification has already begun:

  • on 29 December 2020, the Council of the European Union (the Council) adopted (by written procedure) the Council Decision authorising the signing and provisional application of the TCA and security of information agreement, which was passed unanimously;
  • on 30 December 2020, the President of the European Council and the President of the European Commission signed the trade and co-operation agreement and security of information agreement on behalf of the EU. The nuclear co-operation agreement was also signed on behalf of Euratom; and
  • on 30 December 2020, the UK Prime Minister signed the TCA and other associated agreements on behalf of the UK.

2.      What is not covered by the TCA?

The TCA does not cover any decisions relating to equivalence for financial services,3 nor the adequacy of the UK data protection regime.4 Agreement in this area was always recognised as highly ambitious, and its omission from the TCA is not seen as surprising.

The TCA covers financial services in the same way as they are generally covered in the EU's other trade agreements with third countries. The TCA commits both parties to maintain markets access for operators from the other party seeking to supply services through the establishment of a local branch. It also commits the parties to ensuring that internationally agreed standards in the financial services sector are implemented and applied in their territories.

The UK and EU also issued, at the same time as the TCA, a “Joint Declaration on Financial Services Regulatory Cooperation Between the European Union and the United Kingdom” which provides that the parties will aim to agree, by March of this year, a Memorandum of Understanding (MoU) establishing a framework for regulatory cooperation on financial services. While this is positive, the agreement of an MoU does not have the same legal force as an international treaty and, although it may provide some limited assurances to financial market participants, it does not provide certainty for firms trying to make long-term strategic plans.

The TCA makes no reference to jurisdiction nor enforcement of judgements for civil matters, meaning that the relevant parties need to look to the Hague Convention of 2005, or where that does not apply, local laws. The UK does have an outstanding request to accede to the Lugano Convention, but the EU has not yet provided its consent to the UK’s application. Assuming that the EU will provide its consent, it will still be several months before the terms of that convention apply.

With regards to transfers of personal data, from 1 January 2021, the UK is a third country for purposes of the EU General Data Protection Regulation (GDPR). This means that transfers of personal data from the European Economic Area (EEA) to the UK are prohibited unless the European Commission (the Commission) takes an adequacy decision (or EEA data exporters take steps to ensure adequacy for personal data). The TCA does not contain a data adequacy decision but it does contain a further transitional period of up to six months during which personal data can flow freely between the EEA and the UK without the need for parties to implement additional safeguards to effect such transfers.

Other areas not covered by the TCA include foreign policy, external security and defence cooperation and the assessment of the UK’s sanitary and phytosanitary regime for the purpose of listing it as a third country allowed to export food products to the EU.

3.      What next for financial services following the end of the Transition Period?

Passporting rights no longer apply to UK entities, meaning that UK firms wishing to access EU markets can no longer rely on passporting rights as they did prior to 31 December 2020. UK firms are now subject to the applicable host country rules of each EU Member State.

The UK Financial Conduct Authority’s (the FCA) Temporary Permissions Regime (TPR) allows EU firms to continue to access the UK markets for a time-limited period. Access to the TPR required a notification to have been made to the FCA before the end of the Transition Period.

As mentioned above, the TCA does not cover any decisions relating to equivalence for financial services, but there is some good news in that a Multilateral Memorandum of Understanding concerning consultation, cooperation and the exchange of information has been agreed between each of the EEA competent authorities and the FCA5 (the MMoU).

The FCA, the European Securities and Markets Authority (ESMA) and EU regulators had confirmed in March 2019 that they had reached agreement on certain memoranda of understanding (MoUs), although their precise content was not known prior to their publication on 4 January 2021. In addition to the MMoU, the EU and UK regulators have published three other MoUs:

1)     an MoU between the FCA and ESMA covering supervision of Credit Rating Agencies and Trade Repositories;6

2)     an MoU between ESMA and the Bank of England setting out arrangements for cooperation on the monitoring and supervision of central counterparties (CCPs) established in the UK;7 and

3)     an MoU relating to ESMA’s monitoring of the ongoing compliance with recognition conditions by central securities depositories (CSDs) established in the UK.8

4.      What is covered in the MMoU?

Although falling some way short of equivalence, the FCA and the EEA competent authorities have established through the MMoU a:

willingness to cooperate with each other in order to maintain confidence in the financial system and preserve financial stability in their respective financial markets by providing mutual assistance and exchanging information in their areas of responsibility within their respective jurisdictions particularly as regards investor protection, market integrity, transparency and the orderly functioning of financial markets”.

Within the framework of the MMoU, the FCA and the EEA competent authorities will provide one another with “the fullest cooperation permissible to better enable them to carry out the responsibilities entrusted to them9 under applicable laws and regulations.

The scope of the MMoU is far-reaching, covering cooperation within areas such as:

  • the registration, issuance, offer and sale of securities, derivatives and other financial instruments;

  • asset management companies, collective investment undertakings, depositaries and any other person to whom such entities delegate or outsource any of their functions;

  • trading venues and data reporting services providers; and

  • trading strategies, techniques and behaviours by market participants and trading restrictions on financial instruments.10

The MMoU also includes details on cooperation in the area of outsourcing and delegation – an area of particular interest for the asset management industry in light of the current EU consultation on AIFMD. The MMoU provides that where a relevant entity outsources or delegates any of its functions (in particular, but not limited to, critical or important operational functions, portfolio management and/or risk management) to a person located in another jurisdiction, the principal’s regulatory authority (the home authority) may request assistance from the delegate’s regulatory authority, with the aim of “allow[ing] the home authority to undertake its supervisory tasks, receive information on the supervisory regime of the requested authority and ensure all entities are effectively supervised”.11

Section II of the MMoU provides for specific cooperation arrangements in relation to Entities with Cross Border Operations12 and on matters with direct cross border implications.  The MMoU states that the EEA authorities and the FCA intend to cooperate during the registration and/or authorisation processes of entities with Cross Border Operations (and in the case of withdrawal of a registration or authorisation thereof) and also intend to notify each other of applications for approval to (i) establish a Cross-Border Establishment13 and/or (ii) provide services and/or perform activities on a cross-border basis in their jurisdictions. The MMoU also sets out that the EEA authorities and the FCA will share information on the fitness and probity of prospective directors and managers, qualifying shareholders, and, where relevant, management body members and key function holders, of Entities with Cross Border Operations.

5.      What about “equivalence”?

Although the UK published a set of equivalence decisions for the EU and EEA member states in November 2020, there was no similar announcement from the Commission with the exception of (i) a time-limited equivalence decision for UK CCPs in view of EU financial stability considerations and (ii) a decision on the temporary equivalence of the UK's regulatory framework for CSDs under the Central Securities Depositories Regulation.

A Question and Answer document on the TCA14 published by the Commission on 24 December 2020 confirms that the TCA does not include any elements pertaining to equivalence frameworks for financial services, adding that these are “unilateral decisions of each party and are not subject to negotiation”.

The Commission has assessed the UK's replies to the Commission's equivalence questionnaires in 28 areas but wants further clarifications, in particular regarding how the UK will diverge from EU frameworks after 31 December 2020, how it will use its supervisory discretion regarding EU firms and how the UK's temporary regimes will affect EU firms.

The consequence of this is that the Commission has not finalised its assessment of the UK's equivalence and has said that it “will not take decisions at this point in time”. The Commission confirms that assessments will continue, but even if (or once) formal equivalence decisions are made, equivalence ‘passports’ are unlikely to be in place for several months.

6.      What is the status of the non-UK transitional regimes?

Following the end of the Transition Period, there has been little information from the EU 27 Member States in relation to individual post-Brexit regimes.

In Luxembourg, the Commission de Surveillance du Secteur Financier (CSSF) published a regulation on 24 December relating to the equivalence of the UK for the purpose of the Luxembourg third-country national regime (Regulation No 20-09).15 Regulation No 20-09 provides that a third-country firm may, subject to certain conditions, provide investment services or activities as well as ancillary services in Luxembourg to eligible counterparties and professional clients per se, without setting up a branch in Luxembourg. The CSSF is clear that purpose of Regulation No 20-09 is to include the UK in the list of jurisdictions which are deemed equivalent for the application of the national third-country regime. The CSSF warns that any equivalence decisions may be revoked if one or several conditions on which the decision was based are no longer met.

No other major EU jurisdictions have, as yet, made similar announcements as to the UK’s equivalence to the EU regimes.

7.      Next steps

If you were hoping for the TCA to provide the answers, you will be disappointed. If you were assuming that any deal would focus on non-financial services industries, you will not be surprised.

There is little information on what a financial services trade deal might eventually look like, though it should involve equivalence in areas such as the MiFIR third-country regime, data protection, and exchanges and clearing houses. In the meantime, many firms have activated their Brexit contingency plans, albeit on what should be a short-term basis, and in a less poisonous atmosphere than might have prevailed on a no-deal Brexit. Nevertheless, there are likely to be many instances where both UK and EU firms will need to take a view, or rely on the slim comfort of regulatory forbearance whilst both regulators and market participants find their feet.

Statements by the FCA and ESMA are notably guarded, but there is reason to anticipate an outcome which operates in the interests of all parties. In the longer term, regulatory politics can be expected to evolve into new forms, centred on the new cooperation and equivalence processes, and with more scope for consideration of pragmatic and outcomes-based results.


This OnPoint was authored by Richard FraseChristopher Gardner and Philippa List



1. To access the Trade and Cooperation Agreement, please click here.

2. To access the EU webpage on the TCA, please click here.

3. Equivalence is the concept in certain financial services directives that the regulatory or supervisory regime of a third country relating to a particular sector is of an equivalent standard to that which applies under EU law.

4. For further details on the TCA and what it means for data privacy, please see Dechert’s OnPoint “UK-EU Trade Agreement: Five Key Practical Implications for Data Privacy in Your Business”, available here.

5. To access the MMoU, please click here.

6. The MoU between the FCA and ESMA covering supervision of Credit Rating Agencies and Trade Repositories is available here.

7. The MoU between ESMA and the Bank of England setting out arrangements for cooperation on the monitoring and supervision of CCPs is available here.

8. The MoU relating to ESMA’s monitoring of the ongoing compliance with recognition conditions by CSDs established in the UK is available here.

9 Article 2(4) of the MMoU.

10. The Scope of Cooperation is set out in Article 3 of the MMoU.

11. Article 10 of the MMoU.

12. “Entities with Cross Border Operations” are defined in the MMoU as entities falling within the remit of an EEA authority or the FCA with a Cross Border Establishment which is providing [regulated] services and/or performing [regulated] activities on a cross-border basis in the jurisdiction of another authority; a “Cross-Border Establishment for these purposes means a place of business of an entity falling within the remit of an EEA authority or the FCA which is not its head office and which has no separate legal personality, including a branch or a representative office, and over which the authority of the other jurisdiction exercises supervisory responsibilities.

13. See definition in Footnote 12 above.

14. To access the Commission’s Question and Answer document on the TCA, please click here.

15. To access Regulation No 20-09, please click here.

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