21 May 2020

As national and regional and Governments continue to grapple with the impact of the COVID-19 pandemic, the countdown clock on the UK's departure from the EU keeps ticking. With a little over six months remaining until the end of the Brexit transition period on 31 December 2020, the UK and the EU are only now starting to work through the complexities of implementing the Withdrawal Agreement and Political Declaration. Last week, the UK and the EU held the third round of talks meant to inject much-needed momentum into the Brexit negotiations.  However, with just one round of negotiations now left before the high-level stock take meeting in June, the risk of a stalemate before the Summer continues to increase. Both lead negotiators Michel Barnier and David Frost warned Friday that reaching an agreement based on current positions will be difficult (UK statement here, EU statement here) in the final round of talks – currently scheduled for 1 – 5 June. 

In this note, we summarise the latest round of negotiations, key milestones members should ensure are incorporated into their contingency plans, and seek member feedback on these plans ahead of an FCA Brexit roundtable on 2 June. We understand that the European Commission is stepping up contingency plans to help stakeholders prepare due to increased uncertainty about whether a new agreement will be in place by the end of the year. We, therefore, share our latest update to our tracker of no-deal transitional measures in the EEA Member States for information. 

This note, as well as all previous updates, can be found on our members' page here, along with our UK political updates. 


Heading into the talks, tensions were already mounting

As we covered here, following the last round of talks at the end of April the EU's Chief Negotiator Michel Barnier was openly frustrated about the UK's negotiating approach, criticising its apparent lack of commitment to dealing with the more fundamental differences in position between the two sides, including not publishing a full legal text that could be shared with the EU Member States, and its refusal to contemplate any extension to the transition period considering delays caused by COVID-19. Consequently, the EU was keen to push the UK to engage more fully on access to its waters for fishing and on level-playing field commitments in this latest round of talks, warning that rapid and meaningful progress had to be made if they were going to be able to continue beyond June.  

Heading into these talks, the UK's lead negotiator David Frost, on the other hand, insisted that the UK remained fully committed to securing a negotiated agreement by the end of the transition period. Frost called on Barnier to drop the EU's 'ideological stance' which he blamed for the current differences in position, and suggested that many of the requests were simply 'incompatible' with the will of the British people to 'take back control', and the EU had known so for some time.  After describing last week's talks as 'disappointing', Michael Gove suggested that the COVID-19 crisis had distracted EU leaders. Frost added that Barnier 'can only deal with the hand dealt to him' and that the mandate agreed by EU leaders earlier this year contained 'fundamentally unnegotiable positions' that now risked derailing the talks completely without significant modification.  

Recognising the need for a significant breakthrough, Gove challenged the EU to show 'a little bit of their fabled flexibility', noting he was still very 'confident a deal could be done' despite the little progress made last week towards that goal. In response to Barnier's criticism about the lack of a full legal text being produced for review,  this week the UK will publish its version of how it envisages converting its high-level negotiating guidelines into a final Free Trade Agreement. We will update members once this is made public, but we expect there to be significant divergences in position between the UK and the EU texts. 


June remains a critical moment, but October is increasingly seen as the final deadline for a deal 

Calls for the UK and the EU to agree to an extension of the transition period have died down since our last note at the end of April. We understand that the EU has all but accepted that the UK would not ask for an extension. This would be a failure of the wider Brexit project and the clear mandate from the electorate last year to 'get Brexit done'. June, therefore, remains a crucial milestone in the negotiations. It will be the point at which both sides will need to agree sufficient progress has been made, conclude a draft agreement on fishing, decide whether to extend the transition period, and complete the technical assessments covering access for financial services. 

One option still being discussed is whether the two sides agree to continue with the talks beyond June, and revisit progress at some point after the Summer break. Noting that 'where this is a will, there's a way', this would allow time for more rounds of talks to occur noting the delays caused by COVID-19 to the original schedule and give Government's on either side of the Channel time to assess the full impact of COVID-19 on their economies. With time quickly passing by, however, any decision about extending the transition period at this point or moving to a no-deal footing would need to be made by early October. The EU is now suggesting this as the final point by which any agreement will need to be reached to provide sufficient time to approve and ratify it in both the EU institutions and in relevant national and regional parliaments.  


What does this mean for a deal on financial services? 

The  Political Declaration agreed last year states that each side will only 'endeavour to conclude equivalence assessments' by the end of June. While we understand that the technical assessments are being conducted now on both sides, the Political Declaration is silent on the expected timeline for the necessary legal acts which will give effect to those assessments. Barnier acknowledged that any legal implementing acts would come after the Summer – sending an explicit signal to the UK that they will be treated in line with the US and Japan on financial services – that is any decision about equivalence will be unilateral with no form of co-management. The same approach is being taken to the data adequacy decision due before the end of the year. 

Importantly, the EU also continues to suggest that due to the degree of interconnectedness between the UK and the EU on financial services, any equivalence assessment will need to be 'forward-looking'. This indicates it will consider not just current alignment in its decision-making process but also statements from the UK Government about how and where it may decide to diverge from the EU post-Brexit, for example as set out in its recent Overseas Funds Regime consultation. In public, both the UK and EU reiterate the importance of regulatory cooperation on financial services, but it is clear the road ahead will be challenging for firms wanting to operate on a cross-border basis between the UK and the EU.

Last week, the Chair of the High-Level Forum on the Capital Markets Union, Thomas Wieser, published his predictions for the Brexit impacts on EU's financial markets here. While remaining positive a deal, including financial services, will be reached, Mr Wieser said he expected it would take three to five years for an equilibrium on financial services to be established. His paper foresees possible negotiating extensions and several 'technical details' to be resolved after the main agreement is concluded. He also predicts some equivalences to expire or be withdrawn in areas where divergence will appear, leading to a slow but inevitable shift to the EU of certain parts of financial services activity that for now is still conducted from London.


Member feedback on no-deal preparations: 

On 2 June, the IA will attend a Brexit Roundtable hosted by Nausicaa Delfas, Head of the FCA's International team to discuss no-deal preparations and to provide the industry with an update on negotiations. Members are invited to submit by reply to this email any questions/issues which need clarification by the FCA no later than COP Thursday 21 May. Members are also encouraged to review the FCA website on no-deal activity. 

If you have further questions or have colleagues who would like to receive similar updates in the future, please email us at europe@theia.org.