23 Feb 2021

IA EU Update - EU-UK Memorandum of Understanding

On 22 February 2021, the Council’s financial attachés met to discuss the Commission’s draft for the EU-UK Memorandum of Understanding (MoU) on financial services as agreed in the Trade and Cooperation Agreement (TCA). From discussions the IA have had with various FS attachés in recent weeks to discuss the future relationship, it is clear that the drafting of the MoU is heavily politicised and deeply anchored in the recently released Commission publication on how to strengthen the EU’s ‘strategic autonomy’ in financial services. The IA understand the discussion at the Council mainly focussed on the mechanism for consultation with the European Parliament and Member States regarding the ongoing work for the future EU-UK Forum as there is a strong appetite from Member States to get more closely involved. Below is set out the main features of the EU’s proposed MoU text, the likely impacts for the industry, and next steps.

Highlights of the EU’s draft MoU

Both the EU and the UK signed a non-binding declaration on financial services as part of the TCA on 24 December 2020 . It commits the two sides to ‘establish a structured regulatory cooperation on financial services’ and to sign a MoU that will provide the framework for such cooperation. As at 22 February, these had yet to be shared between the two sides, with formal negotiations set to take place over the next few weeks. The expectation still remains that some form of agreement of the MoU can be reached within the 31 March timeframe set out under the joint declaration, although it is possible negotiations may extend into April.

The IA understand that the current EU’s draft is very similar to the current framework for the EU-US financial services cooperation, with the EU reluctant to agree to any special provisions for the UK over and above those accorded to other third-country jurisdictions. It is built around a voluntary framework facilitating information exchange and regulatory discussion, carrying no legal obligation on either side. The key elements in the draft discussed on 22 Febraury include:

  • The UK Chancellor and the Commission (represented by either the Executive Vice-President Valdis Dombrovskis or the Commissioner for financial services Mairead McGuinness) would meet twice a year at an EU-UK Forum.
  • The Forum’s discussions would focus on:
    • Information sharing on responsive regulatory initiatives to anticipate any potential divergence and implementation issues;
    • Economic impact of responsive proposed rules and sharing of economic and risk analysis;
    • Information sharing on supervision and enforcement mechanisms of international agreed standards and rules;
    • Informal consultations on decisions to adopt, suspend or withdraw equivalence;
  • The Forum’s agenda would be based on the EU and UK respective financial service policy agendas, taking account of the G20 agenda.
  • Both parties would be able to invite relevant financial regulatory, supervisory and resolution bodies, as well as individual experts and representatives.
  • Technical experts could be contracted to undertake assignments  to help inform the discussions and provide updates at the Forum.
  • A joint statement would be published following each Forum meeting.

Impact on the industry

As expected, the draft EU’s MoU is limited to non-binding terms of reference for the future regulatory forum and does not provide for any commitment to include transparency, clarity and certainty of the processes around equivalence decisions. While including ‘informal consultation’ on decisions to adopt, suspend or withdraw equivalence as part of the Forum’s discussions, the Commission continues to reassert that equivalence decisions will remain a unilateral process led by DG FISMA. This means that the UK would have no recourse if the EU opted to withdraw a decision. In discussions the IA have held with Commission officials, they remain upbeat about the potential for a limited number of equivalence determinations later this year, but this is contingent on the UK confirming its legislative and regulatory plans for the sector.

Next steps

Following the conclusion of the TCA, the IA has canvassed member opinions on what should be included in the MoU on financial services. The IA’s position remains as follows:

  • Be forward focused and built around areas of clear common interest, such as sustainable finance, covid, operational resilience and digital. This aligns with the IA’s International and European Engagement Strategy.
  • Provide the option to discuss regulatory or legislative plans as early as possible to manage the risks of regulatory divergence and the related impacts on equivalence decisions.   
  • The MOU should include a series of market focused principles, namely that the Forum supports economic growth and investment in the UK and EU, to minimise disruption and the social and economic consequences of the changed relationship, to ensure autonomy in the decision making process on equivalence and to align closely with international standards.
  • Where the UK and EU autonomously decide to grant access to their markets on an assessment of the equivalence of their respective regulatory regimes, this should be as determined on a regulatory outcomes basis.  These outcomes should be determined by reference to the following shared objectives of financial stability,  investor and consumer protection, fair competition, market integrity, the prevention of regulatory arbitrage.

In addition to presenting these views directly to senior HM Treasury and Number 10 officials, the IA have provided additional input to HM Treasury’s EU negotiations team on the content of the MoU, and contributed to cross-industry efforts through the IRSG and TCUK. The IA are also working with their European colleagues on developing a pan-European positioning with the Commission’s negotiating team. AREF will continue to keep members informed as negotiations progress.