30 Mar 2021

On Friday evening, the technical negotiations concluded on the MOU for financial services between the UK and the EU. The MOU is still subject to political approval, with the final text not yet public. However, this is expected in the coming days. We understand the text has now been shared with representatives of EU Member States and with UK Government representatives beyond the HM Treasury negotiating team. In this note, we set out the MOU's expected content and what members can anticipate over the coming days as the MOU is approved in the UK and the EU.

Scope of the MOU

We understand from our contacts that the two sides have agreed to pursue a relationship based on 'robust and ambitious' bilateral regulatory cooperation, reflecting the breadth and depth of financial services activity between the UK and the EU. Focused on a shared objective of preserving 'financial stability, market integrity, and the protection of investors and consumers', and as referenced in the Joint Declaration attached to the Trade and Cooperation Agreement, the MOU will likely provide for:

  1. Bilateral exchange of views and analysis relating to regulatory developments and issues of common interest:

The main purpose of the MOU will be to establish a regulatory dialogue between the UK and the EU to be known as the 'Joint UK-EU Financial Regulatory Forum. The two sides will be represented by HM Treasury and DG FISMA, with the first meeting between Commissioner McGuinness and Chancellor Sunak expected before the summer. Meetings will be held 'at least semi- annually' and be underpinned by several 'intersessional meetings' at the working level conducted under an agreed annual work programme. We understand that provisions have also been included concerning the Member States' inclusion and 'technical experts as required' in the preparation, conduct, and debrief of these meetings.

Within the MOU text, reference will likely be made to the main objectives each side hopes to achieve through the Forum. It is understood this will include improving the level of transparency about legislative and regulatory plans, reducing uncertainty in the interests of market participants about access, identification of cross-border implementation issues, and potentially even 'compatibility' of each other's regimes. Such phraseology's reflects a subtle but significant shift in the Government's approach, with all references to alignment now updated to a more balanced commitment 'where appropriate'.

For the UK, we understand officials expect this to be a useful way to explain the legislative priorities across various FS files, whilst attempting to maintain some degree of influence over the EU's thinking as it goes into a busy second half of 2021 with the AIFMD/UCITS, ELTIF, and MiFID/R reviews all expected. For the EU, we understand that it will want to use this dialogue to warn the UK of any significant divergence away from the EU's own regulatory regime, whilst reminding the UK the EU itself will retain full autonomy over its legislative agenda.

  1. Improved transparency and appropriate dialogue in the process of adoption, suspension, and withdrawal of equivalence determinations:

In addition to agreeing to establish the Joint UK-EU Financial Regulatory Forum, we understand that the two sides have agreed to increase the level of 'transparency and dialogue concerning the adoption, suspension and withdrawal of equivalence determinations'. While the EU maintains such provisions will never interfere with its ability to act unilaterally, the UK side will view this concession as an essential step towards a positive equivalence determination later this year. We understand that it is likely that the MOU will include provisions encouraging the exchange of views on 'deference regimes, such as equivalence, and other tools', along with conditions requiring the two sides to compare 'risk analysis and economic impact assessments' where this may impact on 'market interconnectedness'. Importantly, we understand that any equivalence process, despite these provisions, will still be subject to each side's own autonomous decision-making arrangements.

  1. Bilateral exchanges of views and analysis relating to market developments and financial stability issues:

 Beyond a commitment to discuss each side's own legislative and regulatory agendas, we understand that the MOU will also cover cooperation on issues of 'mutual interest', such as the performance of MMFs during the March 2020 turmoil. Such provisions will supplement those already included in the MOU signed between the Financial Conduct Authority, ESMA, and Member States in February 2019 permitting the exchange of information about market participants, transaction data, and close cooperation amongst authorities at the working level in the interests of financial stability.

  1. Enhanced cooperation and coordination, including in financial bodies as appropriate:

Finally, we understand that the two sides have agreed to enhance their international fora cooperation, notably the G20 and IOSCO. We understand that 'where practical' the two sides have decided to share positions on agenda items ahead of key G20 and other international meetings, and to keep each other informed of how international standards agreed at such meetings are being adopted at the domestic level.

Implications for the industry

While the final text of the MOU is still subject to political approval, we expect the content of the MOU to remain the same over the coming days. Both sides have worked hard since the announcement of the Trade and Cooperation Agreement to meet the 31 March deadline, with the announcement on Friday a welcome sign that progress has been made since Christmas to bring the two sides closer together again on financial services. While we expect the Commission to maintain its hardline stance concerning equivalence for the UK at least in the short-term, the fact that both sides will soon have a formal mechanism to raise and discuss their different approaches is a welcome and productive step, but as it won't automatically trigger equivalence determinations, is unlikely to mean a substantive change for members operating cross-border into the EU.

Importantly, since the introduction of the UK Internal Market Bill in mid-2020, trust and confidence in the relationship has been at an all-time low, with the vaccine rollout and utilisation of the Northern Ireland protocol further irritants in a tense relationship. It is hoped that the announcement that both sides have reached an agreement on the MOU will help in restoring what many see as a prerequisite for any future equivalence determinations to be made for the UK.