Brexit and Financial Services


What started 2016 with a referendum that was merely deemed a harmless campaign strategy now led to the UK withdrawing from its EU membership as of the 01.02.2020. Accordingly, the UK became a so-called third country and entered into a transition period, during which EU Law was still applicable. This transition period just ended on the 31.12.2020 and EU Law ceased to apply - and this is where the rocky road begins.

Even though the UK had already left the EU, it remained still unclear on what conditions. This uncertainty led to jobs, trading activities and even headquarters to be transferred to other financial hubs in Europe. In the meantime, there were two possibilities discussed: people speculated about the likelihood of a ‘soft’ Brexit, which meant the UK would remain in the EEA or be subject to an extensive trade agreement (the ‘Norway model’). Obviously, this was desired by the financial services industry, the ‘remainers’ as well as academia. Another possible outcome could have been a ‘hard’ Brexit, which would leave the UK without any form of agreement. Nevertheless, the overall mindset remained optimistic, as the industry expected the common economic interest to prevail.

After lengthy ping-pong negotiations, the EU and the UK eventually settled on December 24 2020 for a trade deal, which was welcomed with EU-and UK-wide relief. But it was too early to jump for joy. Despite its importance, the section set out for the framework of the provision of financial services is rather short. Given the fact that the financial services industry provides for 6,5% of the of UK’s gross added value in 2017 and has around a million people working in the UKs financial services sector, one could have the impression this even equals a hard Brexit: the loss of the Passporting rights forces financial services firms to request an authorization within the respective regulatory regime of the Member State they intend to operate. Soon gone was the illusion of cherry-picking free movement rights sector-wise as desired by the UK – a Plan B was needed.

As an alternative to Passporting, the option of third-country equivalence decisions seemed to attract many members of the financial services industry. To benefit from a third-country equivalence decision, the regulatory regime of the UK would have to be considered officially equivalent to the European regulatory regime, for example by satisfying the same legal and economical conditions as required by companies operating in the EU. The third-country equivalence decision is subject to scrutiny of the ESAs[1] and is unilaterally made as well as revocable by the European Commission. We need to analyze whether the option of such a third-country equivalence is as likely and bears as much potential as expected within the industry.

In the Withdrawal Agreement, the EU and the UK agreed to further ‘codify the framework for regulatory cooperation in a Memorandum of Understanding’ (MoU). Thus, the MoU was expected to rule on the issue of equivalence to eventually set a regulatory direction. But again, silence regarding the issue of equivalence. Up to today, equivalence is only possible in very few areas, as only 15 EU acts entail the necessary provisions which are needed to further allow for an equivalence decision. As of the 10.02.2021, there are only two equivalence decisions in favour of the UK. However, there is no broader or even pre-emptive equivalence decision in place that declares the UK regulatory regime generally equivalent to the European one – even though UK is considered equivalent due to maintaining existing EU Law. Obviously, the UK was optimistically hoping for the decision to be made within the two-year period of art. 50 TFEU, but what remains are dashed hopes.

Another handicap of this option is the very patchy scope, as equivalence regimes are only in place for limited EU acts and therefore restricted to only a number of financial services e.g. core services in the sector of Alternative Investment Funds as well as in Banking. With around 40 conditions as well as thresholds varying throughout the European legislative acts, this option is not very promising.

Even though the UK would then have little to no influence on further EU legislative acts which it would have to follow, the UK may decide on a very granular level – e.g. Regulation by Regulation – whether to continue complying and maintaining their status of equivalence or to depart and take the topic in their own legislative hands. This flexibility is the key difference to what would have happened if the UK would have stayed in the EEA. In the absence of any progress in this regard, financial services firms should not rely on the equivalence decision to be made in the foreseeable future. Especially with the Commission being in charge of assessment and decision-making, the inherent political dimension is undeniable and widely feared.

Source: Pixabay


With what we know today, there are three other ways to go: (i) Reverse Solicitation, (ii) Temporary Permission Regime and other exceptions, (iii) establishing a branch in one European Member State and possibly outsourcing.

Now that firms cannot actively target the European market anymore, they could benefit from ‘reverse solicitation’. This means, the UK financial services firm will provide services only upon request of EU clients. In this case, no authorization is needed. Albeit this solution sounds rather appealing, questionable practices circumventing the rules have become increasingly common. Some firms included clauses in their Terms & Conditions to be signed by clients, pretending they did not actively target the European Market - which would be a false statement. This led to ESMA (European Securities and Market Authority) publishing a guidance note as a reminder on how to engage in proper conduct that aligns with the regulatory standards.

After the transition period coming to an end the UK provided for a ‘temporary permission regime’ (TPR) to ensure continuity in the financial services market. The UK tries to establish a friendly environment for financial services providers through the TPR, that allows firms that have previously used the Passporting regime to continue for up to three years while simultaneously undergoing the authorization procedure in the UK. Even though there are EEA countries like Liechtenstein and Norway engaging in solutions like the TPR, the EU did not set up a general TPR for the EU Single Market. Hence, this can be regarded as a one-way solution and not of further relevance.

A more favorable, nevertheless, costly fall-back option for UK companies would be to establish a branch in one EU Member State. British firms, once established and authorized in one of the 27 EU Member States, could benefit from the European Passport Regime again. This option has another advantage: These firms could make use of existing infrastructure, personnel and other (in)tangible assets by turning to e.g. their parent-company for operational or at least organisational support (outsourcing). According to ESMA it is crucial that substantial tasks can be outsourced as long as management and control functions remain within the EU branch to ensure sufficient substance of the firm within the European supervisory and regulatory scope.

Even though there might now be a trade deal, the financial services sector itself experiences a hard Brexit. Still, I believe there is something positive in it for the UK: compared to the European financial market, a less regulated, innovation-friendly environ