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Brexit Latest: UK and EU agree a memorandum of understanding

30 March 2021
The UK and EU have agreed a deal on an initial framework for future financial services co-operation – but meaningful agreements on regulatory equivalence are still not on the horizon and the recent announcement does not yet provide anything concrete for market participants.

After three months of talks, the UK and EU have agreed a memorandum of understanding ("MoU") setting out a joint declaration in relation to the future co-operation on financial services.

The EU financial services commissioner, Mairead McGuinness, previously confirmed during the BBC's Andrew Marr show on 20th March 2021, that there was positive news regarding the MoU. On Friday 26th March, this was followed-up by UK Treasury (HMT) and the EU Commission releasing separate statements confirming that 'technical' discussions on the MoU have been concluded, however, formal steps are still required on both sides before the deal can be signed. Although this is expected to happen "expeditiously".

In a recent statement further publicising the breakthrough, HMT stated that "The MoU will establish the Joint UK-EU Financial Regulatory Forum, which will serve as a platform to facilitate dialogue on financial services issues." The MoU is not a legally binding arrangement however, as hoped for by the UK. Nevertheless, the MoU is a step in the right direction given the EU consider it a pre-requisite in establishing any further market access arrangements for the UK through some form of equivalence.

The Joint UK-EU Financial Regulatory Forum will be attended by a UK financial services representative and a financial services representative of the EU27. It is expected to facilitate dialogue for UK and EU regulators to discuss closer co-operation in future, share information, and hold talks on regulation and supervision, which sit alongside the Trade and Co-operation Agreement. This will include discussions on securing financial stability, protecting market integrity and investors and consumers – the core objectives of the UK and EU regulators. 

However, the MoU simply lays the groundwork for future co-operation, between the two sides and does not address regulatory equivalence; the MoU process and Equivalence are separate and distinct. 

There is speculation that the EU could approve some form of 'partial' regulatory equivalence ("equivalence") for the UK, now the MoU is signed, providing a degree of limited access to the EU market for UK firms. Whilst this will be met with relief by many UK firms, any access granted will still fall far short of providing the UK with access on a par with that under Britain's prior EU membership, or indeed the level of access available to other third countries, such as Japan. At the current time, access arrangements similar to those between the UK and US are being mooted. 

While the MoU is likely to be expedited, it is unlikely to be the case for regulatory equivalence decisions. McGuinness previously said of the EU's position: “We will not be recreating the conditions of the single market for the UK because the UK chose to leave.” Furthermore, McGuinness stated in a press conference in March, that the process of granting full regulatory equivalence to the UK would depend upon the UK aligning to the EU's regulations on a forward looking approach. While this may seem to be a questionable statement, given the UK being the most closely aligned regulatory regime to the EU in the world, it has been suggested by the UK government and UK regulatory sources that they may seek to gradually diverge from EU rules over time. Behind the scenes, this could potentially be one of the main impediments to ever achieving full equivalence.

Despite this, there does appear to be some softening of the EU's attitudes and this is supported by McGuinness' recent comments, and comments made by French minister (Clement Beaune) in an interview in February, where he suggested some form of partial equivalence would likely be granted to the UK in the short-term. A further substantive update on the MoU at least is expected by 31 March 2021. 

For more information contact Andrew Jacobs, Martin Pugsley or Charlie Baillie.

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