The European Union and United Kingdom signed the EU–UK Trade and Cooperation Agreement (TCA) in December. The TCA does not cover financial services, although UK financial markets have had an important role in the European financial services infrastructure and the financing arrangements of European financial companies.
It may take years to see what direction the British regulation of financial services will take. It also remains to be seen how the EU will respond to possible competition emerging from the UK. Prime Minister Boris Johnson’s government intends to use its new regulatory freedom to diverge from EU rules but has not yet provided any specifics.
“This year, for example, the European Commission will give its proposal on renewing the Solvency II regulation on prudential requirements in insurance undertakings. It is not clear yet what the UK will do in this respect. And how will the UK implement the new global banking capital requirements of Basel III?” notes Mari Pekonen-Ranta, director of EU affairs at Finance Finland.
The EU and the UK are able to make equivalence decisions on necessary regulation. This mechanism allows both parties to acknowledge that their laws are similar enough so that financial services can be provided between the EU and the UK similarly to how they are provided within the European single market. A fixed-term decision has already been made for the clearing of derivatives, for example, because much of the European derivatives trade is currently cleared in London with no sufficient EU alternative available yet. The equivalence decision is therefore necessary for market functionality and stability.
“The equivalence decisions are problematic because either party can revoke them at any time. This causes uncertainty in the regulatory environment. Moreover, the equivalence decisions are not made for all directives but only the ones that are deemed necessary for example for stability reasons. Regulation is at risk of becoming a patchwork of different measures”, Pekonen-Ranta comments.
A Memorandum of Understanding on the equivalence decisions will be made in March, and it may clear things up somewhat. Pekonen-Ranta notes, however, that the equivalence considerations involve a massive amount of regulation, and it is impossible to decide on all of it by the March memorandum.
Customers also affected
Brexit affects customers who live in the UK but use Finnish financial services. Finnish financial service providers can no longer automatically operate in the UK; if a Finnish company wants to continue providing financial services in the UK, it needs to obtain a new UK-specific licence. Likewise, British companies will need to be licensed in order to operate in the EU.
The current understanding is that bank accounts opened before the end of the transition period will continue to work, as will the payment cards linked to these accounts. Existing mortgages will also likely continue on as usual.
This however is not the case for all financial sector services. Some Finnish banks have already notified their customers that credit cards will no longer be granted to UK-based customers as from 1 January. Many investment services will be unavailable, and insurance services may undergo changes as well. We advise customers to contact their own service provider for more details.