General impact on Financial Services Sector

On the face of it, Brexit has the potential to severely impact the UK financial services centre generally. For prudential or capacity to do business purposes and for the purpose of the sale of financial products and services in the EU, most of the key types of financial services providers are subject to EU wide regulation. This covers banking in most of its guises, insurance, investment and asset management.

The broad principle of financial regulation in the EU is that in return for following a single EU wide regulatory scheme, financial service providers established in one EU state, can provide services and products throughout the EU. They can establish branches and subsidiaries in other EU countries and or provide services directly from the home state into the host state with a guarantee of no discrimination (so-called passporting).

The above principles are based on the EU single market. They are supported by basic EU rights to provide services, recognition of qualifications, free movement of workers et cetera. Under any option that does not involve the UK membership of the single market or a very close relationship that is equivalent to this, UK authorised firms will lose many of these important rights.

Because most financial institutions and service providers in the sector are multinational in nature, they have the capacity to set up appropriate bases or presence within the EU which have the requisite licensing and regulatory requirements for EU purposes. They may be then able to “back-office” to London service providers, a significant amount of the business supports underpinning the EU services.

The risks are complex and are highly dependent on the rules as they are and any prospective new rules. However, generally,  any Brexit short of single market membership is likely to cause significant disruption and rearrangement of the way which the EU elements of financial services businesses is done.

Many businesses in the financial services sector are servicing what are effectively back-office functions so that all things being equal, there may not be much or the same level of disruption and dislocation. Nonetheless ,  there will be significant changes at industry level which will affect ancillary services industry indirectly.

London already has significant advantages as a financial hub and is significantly ahead of other European centres in many areas. It has developed creative, regulatory, legislative, funding and technology centres in a single place. It has a concentration of activities with significant economies of scale. It is highly interconnected, and the impact of changes is unpredictable.

International worldwide standards are important in financial services, given the interlinked nature of finance. There is a practical necessity for trading blocks and countries having broad regulatory equivalence and being able to have confidence in each other’s standards.

The lack of input into future EU regulation reform is undesirable for the UK. There is a risk of regulatory divergence between the UK and the EU. The UK’s influence on international standards-setting bodies such as the Basel Committee and Financial Stability Board will be crucial in ensuring changes to regulation and internationally.

The EU regulation is based on the regulation of activities and does not necessarily regulate the firms or entity itself. Many firms will have multiple authorisations for undertaking connected activities, which are regulated under different directives and regimes.

The financial system has been described as an ecosystem with complex and enormous interconnections. Sudden regulatory change and uncertainty have the potential to be highly dislocating. Many financial services providers and most banks provide multiple services and the loss of any one or more of those services could have a significant knock-on effect.

EU Regulatory Equivalence

EU financial services legislation contemplates third country access for specific activities. Third-country equivalence must be confirmed by the European Commission. This requires demonstration of regulatory equivalence and compliance between the third country and the European Union.

In principle, the UK from a substantive position would be able to show regulatory equivalence on day one of Brexit. The matter is decided by the EU Commission. The parameters and criteria for a decision as to equivalence are not necessarily clear. The time frames can be long. However, given the existing equivalence, it might be more readily accorded. However, political onsiderations may arise.

The third-country equivalence regime has significant limitations. If the UK found itself unable to enter a trade agreement with full access to the single market in the various financial services, it would be left to resort to the more fragmented third country equivalence provisions.

These include

  • the establishment of CCPs and trade depositories,
  • marketing of alternative investment funds
  • reinsurance,
  • over the counter execution,
  • execution venue for shares and over the counter derivatives,
  • cross-border provisions of investment services.

Other major areas are not covered, include and in particular,

  • bank lending and deposit-taking;
  • retail asset management under UCITs.

Future Relationship in Financial Services Area

It appears certain that the future EU UK Agreement will not involve membership of the single market so that financial services will be no longer subject to single EU wide regulation insofar as the UK is concerned. This implies a much looser relationship with recognition of equivalence in certain areas, but nonetheless significant disruption at some level to financial services.

The October 2019 EU UK future relationship declaration, , makes broad commitments to preserving some level of cooperation, falling very short of membership of a single financial services market.


  1. The Parties are committed to preserving financial stability, market integrity, investor and consumer protection and fair competition, while respecting the Parties’ regulatory and decision-making autonomy, and their ability to take equivalence decisions in their own interest. This is without prejudice to the Parties’ ability to adopt or maintain any measure where necessary for prudential reasons. The Parties agree to engage in close cooperation on regulatory and supervisory matters in international bodies.
  2. Noting that both Parties will have equivalence frameworks in place that allow them to declare a third country’s regulatory and supervisory regimes equivalent for relevant purposes, the Parties should start assessing equivalence with respect to each other under these frameworks as soon as possible after the United Kingdom’s withdrawal from the Union, endeavouring to conclude these assessments before the end of June 2020. The Parties will keep their respective equivalence frameworks under review. 
  3. The Parties agree that close and structured cooperation on regulatory and supervisory matters is in their mutual interest. This cooperation should be grounded in the economic partnership and based on the principles of regulatory autonomy, transparency and stability.
  4. 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.
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