The Brexit agreement between the EU and the UK controversially did not include any commitments on financial services, although the then prime minister Boris Johnson said it would be preferable if it had done so.
However, the trade agreement was accompanied by a (political rather than legal) joint declaration committing the two sides to agree a memorandum of understanding on financial services regulatory cooperation by March 2021.
The MoU was duly agreed but has since existed in limbo, having not been formally signed off by the EU’s institutions.
The European commissioner for financial services, Mairead McGuinness, admitted that the EU is in no rush to approve the accord, evidently considering access to the EU’s single market to be a greater benefit to the UK than vice versa, given the strength of the UK’s financial services.
The suspicion is that market access is also a bargaining chip that the EU might trade for other priorities, not least over the trade border with Northern Ireland.
Following the Windsor framework agreed between the UK and the EU on February 27, some have hoped for a thawing of relations between two jurisdictions and, perhaps, agreements on market access for financial services and products.
Now is a good time to assess the prospects for regulatory cooperation, divergence, and the outlook for firms.
Agreeing to disagree
At the time of writing, parliament is scrutinising the Windsor framework, and the government’s proposal faces some opposition.
Experience suggests it is not wise to predict the political outcomes of Brexit, but having reached an agreement, it is fair to assume that relations between the UK and EU could improve.
Consequently, the EU could be willing to approve the MoU on financial services – although there are two good reasons to believe that an agreed MoU will not change the course of regulatory divergence.
First, the content of the MoU. A leaked draft suggests the EU/UK model for financial services cooperation is based on the EU/US model: a regularly scheduled forum for discussion.
Talking shops can be helpful for the airing of issues, as the joint EU-US forum has proven in respect of thorny areas such as the EU’s research unbundling provisions that conflict with US rules.
But neither the US or UK forum have "teeth": the arrangements do not compel the parties to agree on shared rules or market access, but only to the exchange of views and transparency over common issues and equivalence decisions.
In this respect, the MoU compares unfavourably with the Comprehensive and Progressive Agreement for a Trans-Pacific Partnership (CPTPP), which the UK has announced that it will join. The CPTPP is a liberalising agreement.
Its financial services chapter does not require signatories to adopt specific rules, but rather requires them to remove barriers that prevent CPTPP members from accessing their markets on fair and equivalent terms compared with domestic financial services. So, the CPTPP does not require the UK to become a rule-taker and it plays to the UK’s strengths in financial services, but unlike the MoU, the CPTPP does bind the parties to ensuring market access.
