The UK Government’s Brexit White Paper – a focus on financial services

Posted in Financial services

On 12 July 2018, the UK Government published its long anticipated White Paper on the future relationship between the UK and EU.

We will shortly produce a client briefing note on the White Paper but here are some of the headlines (together with the relevant references).

Financial services

  • The UK recognises that the Single Market is built on a balance of rights and obligations, and that the UK cannot have all the benefits of membership of the Single Market without its obligations [chapter 1, para 6].
  • The UK can no longer operate under the EU passporting regime, as this is intrinsic to the Single Market [chapter 1, para 60].
  • The EU equivalence regime is not sufficient to deal with a third country whose financial markets are as deeply interconnected with the EU’s as those of the UK are [chapter 1, para 62].
  • The UK would seek a new economic and regulatory arrangement for financial services [chapter 1, para 49].
  • Given the importance of financial services to financial stability, both the UK and the EU will wish to maintain autonomy of decision-making and the ability to legislate for their own interests. The decision on whether and on what terms the UK should have access to the EU’s markets will be a matter for the EU, and vice versa. However, a coordinated approach leading to compatible regulation is essential for promoting financial stability [chapter 1, para 61].
  • The 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 [chapter 1, para 64];
  • As the UK and the EU start from a position of identical rules and entwined supervisory frameworks, the UK proposes that there should be reciprocal recognition of equivalence under all existing third country regimes, taking effect at the end of the implementation period [chapter 1, para 66].
  • Whilst future determinations of equivalence would be an autonomous matter for the UK and EU, the new arrangement should include provisions through the bilateral arrangement for: (i) common principles for the governance of the relationship; (ii) extensive supervisory cooperation and regulatory dialogue; and (iii) predictable, transparent and robust processes [chapter 1, para 67].
  • In terms of common principles for the governance of the relationship, the approach would be based on an evidence-based judgement of the equivalence of outcomes achieved by the respective regulatory and supervisory regimes. The UK and EU would set out a shared intention to avoid adopting regulations that produce divergent outcomes in relation to cross-border financial services [chapter 1, para 68].
  • In terms of extensive supervisory cooperation and regulatory dialogue the UK and EU would commitment to a framework that supports collaboration and dialogue. In terms of regulatory dialogue this includes the UK and EU being able to comment on each other’s proposals at an early stage through a structured consultative process of dialogue at political and technical level [chapter 1, para 69].
  • In terms of predictable, transparent and robust processes the UK envisages that some of these would be bilaterally agreed and treaty-based whilst others would be through autonomous measures of the parties. In terms of processes these would include: (i) a transparent assessment methodology for assessing equivalence which would make use of industry consultation and possibly expert panels; (ii) a structured withdrawal process which has clear timelines and notice periods which are appropriate for the scale of change before it takes effect; and (iii) long term stabilisation with each side trying to avoid future changes that assess equivalence in new ways that could destabilise an established relationship [chapter 1, para 70].
  • Where disputes arise between the UK and the EU on binding treaty-based commitments institutional arrangements (described in chapter 4) apply [chapter 1, para 71].

Free movement

In relation to the free movement of persons and future mobility arrangements, the White Paper provides that “the UK will make a sovereign choice in a defined number of areas to seek reciprocal mobility arrangements with the EU, building on current WTO GATS commitments” [chapter 1, para 76].

Energy

In relation to electricity and gas the White Paper the UK Government states that it wishes to explore with the EU the options for the future energy relationship citing two possible options (leaving the Internal Energy Market (IEM) or participating in the IEM) [chapter 1, para 140].

The White Paper also states that the UK is putting in place arrangements so that after Brexit, businesses will not face substantially different requirements compared to their current obligations under the EU Regulation on Wholesale Energy Market Integrity and Transparency [chapter 1, para 142].

Goods

In terms of goods, the UK is proposing the establishment of a free trade area for goods, including agri-food. The UK and the EU would maintain a common rulebook for such goods with the UK making an upfront choice to commit by treaty to ongoing harmonisation with EU rules on goods, covering only those necessary to provide frictionless trade at the border [chapter 1, para 11]. The UK’s proposal for a free trade area for goods also includes a Facilitated Customs Arrangement [chapter 1, paras 13 to 21].

Institutional arrangements

The institutional arrangements for the future UK / EU relationship are discussed in chapter 4 of the White Paper. The White Paper states that precedent suggests that the UK’s proposal would take the form of an Association Agreement between the UK and the EU [chapter 4, para 4]. The future relationship would likely consist of a number of separate agreements, each covering different elements of cooperation. The details of each individual agreement is subject to negotiation, some will be legally binding (for instance, components of the economic partnership such as a core Free Trade Agreement) while others will be based on political commitments [chapter 4, para 5].

Commission and European Parliament reaction

Michael Barnier, the European Commission’s chief Brexit negotiator, has said that he would analyse the proposals in the White Paper with EU27 Member States and the European Parliament “in light of guidelines” drawn up by EU27 leaders. Mr Barnier is due to meet EU27 ministers on 20 July, where they will debate how to respond to the White Paper.

The European Parliament Brexit Steering Group (BSG) has also released a statement. The BSG has welcomed that the UK is proposing that the future EU – UK relationship take the form of an Association Agreement which has been the European Parliament’s position. However, the BSG also reconfirmed the European Parliament’s position that it will not consent to a Withdrawal Agreement, including a transition period, without a credible “backstop” provision for the Northern Ireland / Ireland border. It also noted that other elements of the Withdrawal Agreement, including the governance provisions still needed to be agreed.

Comment

Jonathan Herbst comments on the White Paper:

“Whilst this is not the commitment to a mutual recognition regime that many in the City wanted, it takes the discussion further in a lot of ways. It hits the EU’s point that there can be no replication of the passport: if you leave the single market then that is what you are doing. However, set against this, it sets out an ambitious programme of what I would describe as “managed autonomy” and “enhanced equivalence” at least for the wholesale market. This means that both the EU and UK will run their own regimes. Mutual access will be what it says on the tin: each side will grant access to the other on equal terms which is a significant potential shift from the UK’s historic open borders policy for wholesale business coming in. In return for that, there will be mutually agreed principles to guide regulation on the two sides and a managed process of mutual equivalence assessment which seeks to give certainty of process and appeal mechanisms whilst allowing an ultimate freedom to make changes.

Of course, two big questions are left unanswered. If the whole package were to be agreed but the UK chose not to move away from the EU regime would this not look like a form of mini-passporting and , secondly, will there be any appetite from the EU side to engage on the substance? That said, the policy arguments in favour of a rational managed autonomy approach are strong and if we leave the politics out of it the idea that it is good for the EU and for the UK to keep as liquid and deep a market in both London and the EU financial centres is hard to argue with. Minds should also be concentrated by the spectre that if global business moves it is not likely to be to EU centres but to other global hubs.

So for business on the ground the message is likely to continue to be: plan for the worst but hope for the best. Whether the White Paper will impact the timing of implementation plans remains to be seen.”

This briefing also features as a post on our Financial services blog: Regulation tomorrow.

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