After more than four years, it appears the end to Brexit is now in sight – deal or no deal. Last night over a fish dinner in the Berlaymont, the Prime Minister and President Von Der Leyen failed to agree the breakthroughs necessary for a final deal to be concluded. Noting that 'significant gaps' remained on level-playing field commitments and governance of any agreement, the two sides did, however, agree to give the talks one final push over the next 72 hours. With just three weeks left in the Brexit transition period, the final state of any future relationship between the UK and the EU is still not settled. But the signal from both negotiating teams is now that one way or the other we will know the final outcome of Brexit on Sunday evening.
Going to the wire
The Brexit talks were always going to come down to a final ‘make or break’ moment. While the dinner held between Boris Johnson and President Von Der Leyen was widely billed as that moment, it appears we will have to wait a few more days to see whether the UK and the EU can conclude an FTA. Armed with a list of outstanding issues from their lead negotiators, Johnson and Von Der Leyen were unable to agree on the compromises needed on level-playing field obligations and governance. Instead, both sides agreed that talks could resume, but only for 72 hours with Sunday the point at which both sides will need to either conclude an FTA, or walk away.
Unhelpfully, while the UK Foreign Secretary Dominic Raab has told Sky News this morning that he regards Sunday as a “point of finality” but added “you can never say never with these EU negotiations”. A consensus had existed among journalists and many in Westminster that the dinner was a piece of political theatre which would precede a deal. However, the cold tone of the post-dinner statements has raised the uncertainty around the prospect of a deal. It remains to be seen how the Conservative Party in parliament will react to the prospect of no deal and, if they are unhappy, whether they have time to do anything about it.
Of central concern is what is becoming known as the ‘ratchet’ clause. This would require each side to follow the other on regulatory standards or suffer consequences across the agreement. Such a clause was used by the EU in its 2019 debate with Switzerland over access to trading venues, and is seen as an attempt by the EU to lock the UK into the EU rulebook in perpetuity, a clear red line for the Johnson Government. Equally a red line for the UK Government, after lobbying by the IA last month of Number 10 officials and the Chancellor, are attempts by the EU to limit delegation of portfolio management through the use of a prudential carve out. We understand that this will be dropped in the exchange to come in the coming days, with UK officials noting they would never accept such provisions in a trade agreement with the EU.
Is there time to ratify a deal?
Assuming that a deal can be found over a few final frantic days, the next challenge will be its ratification. Entering into a treaty is a prerogative power of the UK Government – meaning it does not require parliamentary approval – but any changes to UK law which follow from treaty commitments would need to be legislated for. In the UK, the Government's working majority of 85, and Labour's commitment to doing what is “in the national interest”, should make passage of any necessary legislation a relatively straightforward exercise. Under UK law, new treaties should be laid before Parliament for 21 sitting days before ratification to allow for MPs to object to them. However, legislation also allows the Government to forgo this requirement in unspecified “exceptional circumstances” if they explain their reasons for taking this approach. The Common’s Speaker has said he would like to get everything done on Brexit by the Monday before Christmas, but would be willing to run things “up to Christmas Eve”. There are also contingency plans for MPs to sit between Christmas and New Year if necessary.
In the EU, the process of ratification is less straightforward, and we understand from our contacts with EU officials that the Commission is growing increasingly tired of UK efforts to try and second guess how any deal would be ratified in time. The Commission will first need to opine on whether the final agreement is a 'sole competency' agreement – that is within the powers delegated to the Commission by the Member States – or a 'mixed competency' agreement – that is it includes powers both of the Commission and the Member States. Should the Commission find it is a sole competency agreement, the final legal text will then need to be approved by the European Council. Given negotiations are now continuing until Sunday, it won't be possible for leaders to receive such a text today when they meet. Instead, it is likely a special session will be needed.
Once approved by Council, it will then need to go to the European Parliament for its endorsement, but precisely when is a matter of great political sensitivity. Currently, a special session of the European Parliament is scheduled for 28 December, but its likely MEPs will want more time to review the final text. To smooth this process, the EU negotiating team has been briefing the Parliament's Brexit Steering Group on an almost daily basis, but on a matter of such strategic importance to the EU, MEPs won’t want to be bounced into any agreement by the Council.
If it is a mixed agreement, any agreement will also need to go to national and regional parliaments for ratification. Should this occur, it is likely that the Council will move to adopt the deal on a provisional basis, subject to member ratification in the new year.
How does this affect our industry?
Throughout the Brexit process, the IA has advocated for a deal that protects the interests of savers and investors, wherever they are located. Whether there is a deal reached or not in the coming days, it will not, however change the central scenario facing firms due to the absence of equivalence determinations by the EU. While the UK has acted unilaterally granting equivalence to the EU to avoid further fragmentation in the market, the EU remains steadfastly determined to relocate critical financial services activity to the continent. Commissioner McGuinness is keen for the EU to reduce its reliance on the UK for financial services. We should therefore expect to see the Commission continue with its agenda of 'complementarity' under the guise of creating a deep and fully integrated EU Capital Markets Union.
For the UK, the absence of a deal will free the UK Government of obligations to align with the EU across the range of regulatory issues and industries. This allows it to follow a path of divergence but, again, all indications from HM Treasury, including the Chancellor’s recent statement on the future of financial services, suggest this is not a path the Government would choose to follow to any substantial degree with financial services.
As always, if you have remaining questions, please contact us by emailing brexit@theia.org.