Late in the afternoon of 24 December 2020, the UK government and the EU Commission announced that the UK and EU had agreed the terms of a post-Brexit Free Trade Deal. The text of the Agreement was published later the same day. The media (and social media in particular) are already myth-ridden. Here, we consider and bust five of the myths that affect banks, insurers, investment firms, payment services providers and e-money issuers.
Myth 1: The Agreement has nothing to say about financial services
The Agreement mentions “financial services” 90 times. On some occasions, it is only to say that a “provision does not apply to financial services”, but that is hardly enough to justify this myth.
There is a “prudential carve-out”, which allows each of the UK and EU to adopt and maintain its own prudential measures (a) for the protection of depositors, investors and policyholders; and (b) to ensure the integrity and stability of their own financial system.
Each of the UK and EU is also obliged:
- To use its “best endeavours” to ensure that internationally agreed standards are implemented and applied including, for example, those adopted by the G20; the Financial Stability Board; the Basel Committee on Banking Supervision; the International Association of Insurance Supervisors; and the Financial Action Task Force
- To allow banks, insurers, investment firms and payments businesses from the other territory, but established in its territory:
- To supply a new service in its territory, if it would allow its own banks, insurers, investment firms and payments businesses to supply that service in the same situation. However, this does not apply if new laws, or existing law changes, are required; and it does not apply to branches
- To access (a) the payment and clearing systems operated by its public entities; and (b) the official funding and refinancing facilities available in its territory in the normal course of ordinary business (but not its lender of last resort facilities).
The Agreement confirms the existing EU position: that subsidiaries in the EU are entitled to provide their services, and to establish branches, across the whole of the EU, but third-country branches in the EU are not. It also lists the individual Member State laws that apply to third-country providers – a list that might be useful to some. So, for example:
- Belgium, Poland, Portugal and Spain will not accept third-country-branch insurance distributors
- Austria will accept third-country branch insurance distributors, but they must be managed by at least two individuals who live locally
- Third-country insurers can only supply insurance in Sweden, if (a) it is mediated by a Swedish insurance distributor; and (b) the foreign insurer and the Swedish distributor are either in the same group, or they have entered into a co-operation agreement with each other
- Denmark, Hungary and Lithuania will not allow third-country insurers to provide insurance in their jurisdictions, unless they do so through a locally authorised branch.
The Agreement does therefore have something to say about financial services, even if it is not immediately useful for anyone who wants to buy or sell financial services on or after 1 January 2021.
Myth 2: The Agreement means I don’t have to worry about losing the financial services passport
The financial services passport is derived from the Treaties of the European Union. The Directives of the European Union merely explain what an EU-domiciled business needs to do, if it wants to use the passport when it carries on its business as a bank, an insurer, an investment firm, or payment services provider.
The Treaties will stop applying in and to the UK, and UK-domiciled businesses, at 11pm on 31 December 2020. After that, the inwards and outwards passports will fall away, and the Agreement does not stop that happening.
The result is that, if you are in the UK and your customers are in the EU (or vice versa), you do need to worry about losing your financial services passport. In particular, if you have not already made other plans, you might find you cannot lawfully provide services from the UK to your EU customers (or vice versa) after 11pm on 31 December 2020.
Myth 3: Although I have EU customers, my business is run entirely in and from the UK. So, I’m not using the financial services passport, and don’t have to worry about losing it
The financial services passport is in two parts. If your business is run entirely in and from the UK, you might not be using the UK part of your passport. However, if you have customers in the EU, you are probably using the EU part. If you are, you will not be able to lawfully serve those customers after 11pm on 31 December 2020, unless (a) the law in the country where your customers are based allows you to do so; and (b) you have done everything you need to do under those local laws, to maintain your existing rights.
The same principles apply, if your business is run entirely in and from the EU, if you have customers in the UK.
Myth 4: Equivalence will save me
There are 42 areas of potential equivalence. They are very narrow, and sector and activity specific. So, for example:
- There aren’t any areas of equivalence for payment services providers or e-money issuers
- There are only three areas of equivalence for insurers, which are so narrow that if the EU finds that the UK is equivalent in all three areas (and it might not):
- UK reinsurers will be able to provide reinsurance to EU insurers without having to post collateral in the EU (collateral may be required, if equivalence is not found)
- EU insurance groups will be able to calculate their group-SCR and group own funds using (a) the EU’s Solvency II rules, for the EU parts of the group; and (b) the UK’s Solvency II-equivalent rules, for the UK parts of the group (if equivalence is not found, UK insurers will have to calculate their solo solvency requirements and own funds using the UK rules, and their contribution to the group-SCR and group own funds using Solvency II rules instead)
- EU regulators will still be able to rely on the PRA and FCA to lead on group supervision for those insurance groups with a top-company / holding company in the UK, and subsidiaries in the EU (if equivalence is not found, the EU regulators may require these groups to re-structure, so that EU regulators can lead on group or sub-group supervision instead).
The UK has found the EU to be equivalent in all 42 areas.
The EU has only been willing to make two temporary equivalence decisions so far:
- from 1 January until 30 June 2021, it will regard the UK’s legal and supervisory arrangements applicable to central securities depositaries (CSDs) as equivalent. This means that EU transferrable securities issuers can keep using the notary and central maintenance services provided by the UK’s CSDs until at least 30 June 2021; and
- from 1 January 2021 until 30 June 2022, it will regard the UK’s legal and supervisory arrangements applicable to central counterparties (CCPs) (CCPs) as equivalent. This means that organisations in the EU can keep using the clearing services provided by the UK’s CCPs until 30 June 2022.
In each case, the EU has said that it wants to use the temporary equivalence periods to reduce the EU’s reliance on the UK’s CSDs and CCPs.
It is worth noting that when equivalence is found, the primary beneficiaries are in the territory that grants equivalence – not the territory that receives it.
It follows that very few businesses will be saved by equivalence. And that, although equivalence might help some, it won’t help very many, very much, or for very long. The Agreement does nothing to change these facts.
Myth 5: It is all so last minute that regulatory action is unlikely. They’ll give me time to adjust
Nothing could be further from the truth. From the perspective of the regulators, the direction of travel has been clear for a long time: the Agreement would not cover financial services; the passports would be lost; and equivalence was too narrow, too sector and activity specific, and too uncertain for anyone to rely on it becoming available in time to help. UK firms with customers in the EU, and EU firms with customers in the UK, would therefore have to make other plans (and had plenty of time to do so).
If you are still relying on the passports, and you carry on your business after 11pm on 31 December 2020 as if the passport still existed, that will be unlawful and regulatory action may follow.
Even if the regulators do not act, in some countries, the business you do, and the contracts you enter into, may be void, voidable or unenforceable – and your customers could sue. If you haven’t therefore adjusted your business yet, time is of the essence.
If you have any questions about these issues in relation to your own organisation, please contact a member of the team or speak with your usual Fox Williams contact.
Click here to read more myth busters relating to the EU / UK trade agreement.