UK-EU free trade agreement covering financial services
It is now pertinent to examine the possibility of financial services to be included in a future free trade agreement between the UK and the EU. It is theoretically possible for the UK and EU to conclude a free trade agreement with a chapter on financial services that would grant access to each other’s markets and provide for mutual recognition of each other’s regulatory frameworks or parts thereof. Such an agreement would grant UK financial firms passporting rights (probably using different terminology) to operate in the EU and vice versa, and would include institutional arrangements to ensure that the regulatory frameworks of the UK and the EU do not diverge in the future within the scope of such rights of access.
Indeed, Philip Hammond, the former Chancellor of the Exchequer, consistently advocated this option as it would provide UK financial firms with the necessary legal certainty and clarity. He canvassed this scenario as follows:
[T]he principle of mutual recognition and reciprocal regulatory equivalence, provided it is objectively assessed, with proper governance structures, dispute resolution mechanisms, and sensible notice periods to market participants clearly could provide an effective basis for such a partnership. And although we will be separate jurisdictions, we would need to maintain a structured regulatory dialogue to discuss new rules proposed by either side building on our current unparalleled regulatory relationships to ensure we deliver equivalent regulatory outcomes agreeing mutually acceptable rule-changes where possible.
Tempting as this scenario may be for UK banks, the prospect of including the financial services within a future free trade agreement between the UK and the EU looks dim due to the firm position taken by the Commission and Michel Barnier. Their position is that
the UK will face a stark choice between EEA membership and a Canada-style free trade agreement covering (most) goods, but not services.[1] This was reluctantly accepted by the UK Government, which in its much discussed Chequers white paper conceded that access to financial markets will be a matter of equivalence rather than mutual recognition:
This new economic and regulatory arrangement would be based on the principle of autonomy for each party over decisions regarding access to its market, with a bilateral framework of treaty-based commitments to underpin the operation of the relationship, ensure transparency and stability, and promote cooperation. [...] As part of this, the existing autonomous frameworks for equivalence would need to be expanded, to reflect the fact that equivalence as it exists today is not sufficient in scope for the breadth of the interconnectedness of UK-EU financial services provision.
Evidently, the previous Government hoped for a governance framework that would be enshrined in a legally binding treaty but does not seek automatic mutual recognition, but rather unilateral equivalence granted autonomously, in line with current practice. So, it appears that, barring a major U-turn leading to the UK joining the EEA, the future —relationship between the UK and the EU in the area of financial services and markets will be based on autonomous and unilateral determinations of regulatory equivalence. In the worst case, from the UK’s perspective, this will operate exactly as the current EU framework on equivalence. In the best-case scenario, there will be a binding treaty providing for an institutional framework for the making of such determinations on the basis of the following principles: regulatory dialogue, supervisory co-operation, transparent and objective assessment methodology and a presumption against unilateral changes that narrow the terms of existing market access regimes.
It is worth noting that the political declaration for the future relationship between the EU and the UK clearly envisages that the financial services will be dealt with within the existing equivalence frameworks that the EU and the UK operate for third countries. Still, it vaguely alludes to instituting a process for making such determinations:
This cooperation should be grounded in the economic partnership and based on the principles of regulatory autonomy, transparency and stability. It should include transparency and appropriate consultation in the process of adoption, suspension and withdrawal of equivalence decisions, information exchange and consultation on regulatory initiatives and other issues of mutual interest, at both political and technical levels.
- [1] Jim Brunsden, ‘EU Rejects Brexit Trade Deal for UK Financial Services Sector’ Financial Times (London, 31 January 2018), available at
