An extension to the transition period envisaged in Prime Minister Boris Johnson’s Brexit deal may be required to negotiate access for U.K. banks to the European Union on a scale never previously attempted, says financial sector lobby group, TheCityUK.
Future arrangements for financial services are covered in the political declaration accompanying the deal negotiated between Johnson's government and the EU. This declaration, along with the withdrawal agreement, makes up the sum of the U.K.’s Brexit deal.
The political declaration says that both sides should start to assess the equivalence of their regulatory and supervisory regimes as soon as possible after the U.K. quits the bloc — at this point still scheduled for Oct 31. — kicking off a 14 month-long transition period. This is so a future deal on market access can be based on an acceptance by both sides that the other’s financial regulations are sufficiently aligned to its own.
The declaration lays down a deadline of the end of June 2020, for the two sides to conclude their assessments.
However, TheCityUK, which represents banks and financial and related professional services across the U.K., called the timing set out in the political declaration "very ambitious" and said an extension to the transition period outlined in the deal might be required.
"We think that the transition will need to be extended to get the next stage of the negotiations done. While we wouldn’t suggest a specific length of time, any transition should last until the new landing zone is known, with time included for firms to adapt to this new relationship," said a spokesman for TheCityUK, who declined to be named.
The transition period contemplated in Johnson’s deal with the EU is currently due to run until the end of December 2020, the same as that in the previous deal negotiated by Theresa May who had set as March 31, 2019, as the deadline for the U.K. to exit the EU. Under the terms of the new deal, it is possible for the transition period to be extended by one or two years but that must be settled before July 1, 2020. During the transition period the U.K. will not be a member of the EU but it will still have to abide by its rules.
A deal like no other
The U.K. is aiming for a level of access to the EU for financial services firms similar to its existing status as an EU member. This is based on "passporting" whereby banks within the U.K. can sell services across the EU. Though the EU has equivalence deals with many other jurisdictions, including the U.S., the level of access the U.K. hopes for would be unique.
"There is nothing like this with any other country. Yes, the EU has assessed the equivalence of U.S. banks for the purpose of risk-rating, but that is not market access. This is different. The question is do the parties want to make this work? The issue is really political: where do both parties want to see the future relationship heading?" said Chris Bates, head of Clifford Chance’s financial regulation practice in London.
The U.K. previously aimed for "enhanced equivalence" that would include mechanisms to ensure that the EU did not summarily withdraw access to its markets. There is an indication in the political declaration that some form of additional reassurance over the longevity of any equivalence arrangement is intended. It outlines plans for "appropriate consultation" in the equivalence process, for instance.
"What the U.K. is keen on is some notice period of EU withdrawal from an equivalence arrangement. There is often an assumption that there is a 30 day notice period in these arrangements but, in fact, the EU can withdraw from it with no notice at all. The U.K. envisages some sort of treaty-based arrangement which would put some sort of process around that," said Bates.
However, British regulators have long made clear that the U.K. must maintain its regulatory independence in financial regulations after Brexit.
"We want to see the best possible mutual market access, but equally, long term, London can't commit to automatically following rules in which it has not played a part in making," said TheCityUK.
Should the U.K. leave the EU on Oct. 31, as the government still intends, it will be entirely compliant with EU law which in theory ought to make setting up equivalence arrangements straightforward. However, such a situation is no guarantee that a permanent arrangement will be reached. Despite long-standing arrangements, the EU recently withdrew access to its markets for Switzerland after the two sides failed to agree on a new framework agreement for market access, for instance. In July, the European Commission said it was reviewing its approach to equivalence in the financial services industry.
According to TheCityUK's own figures, the banking, insurance, asset management and related sectors are, together, responsible for generating 10% of the country's total economic output and is its biggest exporting industry.