24 Dec 2020

Four and a half years to the day since the Brexit referendum of June 2016, a Brexit deal has been reached ‘in principle’ this afternoon. The two sides had been close to an agreement for some days, with this week’s delays at the Dover-Calais crossing helping to focus minds. At not quite the final hour, negotiations came down to vigorous haggling over specific amounts of fish that can be taken from British waters under a transitional agreement, and review mechanisms for level-playing field obligations.  

This note summarises the main elements of what has been announced so far today (the full text is yet to be published), and what to expect in terms of ratification of the deal over the coming weeks. The IA is monitoring developments closely, and members are invited to submit any questions to [email protected]

What is expected to be in the text of the deal?  

For our sector and indeed financial services generally, the deal is light on any special provisions relating to the ability to offer products and services cross-border. Critically, it does not include the right to passport their services into the EU, with access to the EU’s Single Market dependent on a positive equivalence determination from the European Commission which remains outstanding. While we await the detail contained in the full text, we understand that the main elements of the deal to include: 

  • Regulatory cooperation and information sharing - There is no regulatory cooperation annex although there is a short Joint Declaration which says both parties will agree by March 2021 a Memorandum of Understanding establishing the framework for structured regulatory cooperation on financial services. The MOU will aim to provide the ‘transparency and appropriate dialogue in the process of adoption, suspension and withdrawal of equivalence decisions’ as well as discussion on how to move forward with equivalence determinations’. 
  • Delegation of portfolio management activity – the EU had sought to include a ‘technical headnote’ granting it the ability to limit the provision of certain services on prudential grounds, including the delegation of portfolio management activity. After lobbying by the IA of senior Number 10 Officials, this text was removed from the final version, although it would not prevent further attempts to limit delegation in the future by the EU, such as through the AIFMD review.  
  • Cross-agreement retaliation – The EU wanted to include financial services within the cross-retaliation provisions so it could respond to divergence (and by extension competition) over time. The UK opposed such a measure, with financial services now insulated from retaliation in the event of a dispute in other areas of the agreement as had been seen with Switzerland on Share Trading in 2019. However, this would not restrict the EU from withholding equivalence, or revoking any such determinations in the future, should it wish to do so. 
  • Data adequacy - as the EU does not have sufficient time to pass the necessary delegated acts to grant the UK data adequacy, the two sides have agreed to a ‘bridging mechanism’ which will last for six months and allow personal information to be shared in accordance with GDPR obligations. The two sides have also agreed on a ‘free flow of data’ provision that will prohibit unjustifiable restrictions on where data can be stored and transferred across borders – a first for the EU in any other trade agreement. 
  • Movement of people - UK business visitors will be able to stay in the EU for 90 days in any 180-day period. The two-sides have also agreed commitments on visa facilitation for professionals engaged in cross-border trade, although these details have not been published. 

What happens next? 

Now an agreement in principle has been reached, the Brexit deal will need to be ratified. Passing the deal through the Commons should be straightforward given the Prime Minister’s majority of over 80. The deal faces no substantial opposition: the European Research Group will be reconvening its ‘star chamber’ of lawyers to comb through the detail, but the Prime Minister has been careful to keep them well briefed throughout the negotiations, so they are unlikely to cause him serious concern. Labour too will back the deal, on the basis that any deal is better than no deal. 

It is likely that the Commons will be recalled on December 29th or 30th for a single day of debate. This short process is possible because the government will use Section 22 of the Constitutional Reform Act, citing the ‘exceptional circumstances’ which mean the agreement does not need to be subject to the usual 21 sitting-day review period in the UK Parliament. The Prime Minister will be hoping the deal allows him to end the year on a slightly higher note.  He can claim the deal fulfills his manifesto promises to take back control of Britain’s laws, trade and borders and avoid the influence of the ECJ. Although coronavirus will clearly soak up political attention into 2021, being seen to deliver on his promise to ‘get Brexit done’ will give the government the momentum and scope to focus on longer term plans.  

In the EU, the process for ratifying the Brexit deal will be more complicated, largely due to the failure by negotiators to meet the European Parliament deadline to conclude a deal by last Sunday. With only a few days remaining until the end of the transition period, the Commission will need to ask the European Council to apply the deal on a provisional basis until the European Parliament can hold its own voting session in the New Year. The 28th of December was tentatively scheduled for this, but it's unlikely to be enough time for the EU process to be completed by the end of the transition period due to the need to translate the agreement into all official languages of the EU. Until this is complete, the ‘non-final’ English-only version will apply. 

A meeting of EU ambassadors has been confirmed for tomorrow morning in Brussels to start the ratification process. Noting that Member States reserve the right to veto a deal, the Commission will want to carefully demonstrate how the final text accurately reflects the political mandate agreed earlier this year. The Commission has been keeping Member States closely informed of developments in recent days in anticipation of having the pass a deal quickly, and we understand there are few barriers now in place preventing the deal applying provisionally by 31 December. 

What does the deal mean for our industry? 

The elements on financial services in the deal will go some way to protecting the industry from future attempts to forcibly relocate business to within the EU, but it is by no means the final statement on Brexit, especially given the commitment in the Joint Declaration on future equivalence. Without an over-arching equivalence determination under MiFIR, UK-based investment firms will need to either rely on an EU entity to offer products and services within the EU, or utilise the patchwork of national exemptions and license arrangements to continue servicing European clients until at least June 2021 when the new provisions of the Investment Firm Regime come into effect.  

It should also be noted that while financial services may be shielded from any cross-retaliation in the agreement, the EU is preparing to issue a new strategic action plan on financial services in the New Year under Commissioner McGuinness, setting out how it intends to build up its own Capital Markets Union over the next 3 to 4 years, to break the EU’s reliance on the UK in financial services. This document will be critical in shaping the EU’s approach to the industry post-Brexit and will likely contain several measures directed at lessening the attractiveness of the UK as a location for financial services entities to locate in the longer-term, in addition to planned reviews in 2021 of AIFMD, MIFID, ELTIF and a Sustainable Finance Action Plan. 

IA Comment issued to the press

We issued the following comment this afternoon: 

Commenting on the UK-EU Brexit trade deal, Chris Cummings, CEO of the Investment Association, said: 

"Today's announcement that a deal has been reached is good news for the millions of British and European savers and investors who rely on the investment management industry and is a welcome first step in defining the future relationship between the UK and the EU. Given the economic impact of the coronavirus, it is essential that governments focus on growth orientated policies that support a swift recovery.  The investment management industry has a central role in helping to turn the savings of millions of people into investments that companies now urgently need.  The best way to unleash this potential is for the EU to recognise the UK's regulatory regime as being equivalent to its own and minimise any further disruption in the market"