Better late than never – UK-EU Memorandum of Understanding on Financial Services signed – what happens next for EU firms?

RegCORE Client Alert | The EU beyond Brexit

QuickTake

After a long time coming, the UK and the European Commission signed the UK-EU Memorandum of Understanding on financial services regulatory cooperation (the MoU).The MoU is available here. See also opening remarks from EU Commissioner McGuinness available here.Show Footnote In the EU-UK Joint Declaration on Financial Services Regulatory Cooperation of 24 December 2020 the parties had committed to have signed an MoU by March 2021. The conclusion was postponed due to a breadth of political and pandemic-related reasons. However, the European Commission and UK government have on 27 June 2023 signed the MoU in Brussels and are thus committed to “a robust and ambitious bilateral regulatory cooperation in the area of financial services” to maintain financial stability, market integrity, and investor and consumer protection.

The MoU establishes a Joint UK-EU Financial Regulatory Forum (the Forum) for “structured regulatory cooperation” on financial services regulatory concerns. Every six months, the Forum alternates its meetings between the EU and the UK. The Forum’s first meeting is expected in the Autumn 2023 and joint statements setting out visibility of the outcomes following each semi-annual Forum meeting are expected to contribute to the transparency of the Forum’s progress on points on its agenda.

While the MoU welcomingly commits both sides to working together, it does not address UK firms’ access to the EU Single Market or EU firms’ access to the UK market. In short, the Forum is unlikely to be a silver bullet to solving numerous post-Brexit issues. Hope is that it can achieve meaningful cooperation on the forward-looking regulatory agenda and issues that are common to both the UK and the EU.

This Client Alert assesses the content of the MoU from an EU perspective, what it does and what it does not do and queries whether it is more of a paper tiger or will actually translate into tangible and pragmatic issues for EU domiciled financial services clients and markets. This Client Alert should be read in conjunction with a view from our UK colleagues available here.

A focus on the Forum’s aims and tasks

The Forum is comprised of the EU’s Directorate General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA), which develops and carries out the European Commission’s policies on financial services, as well as HM Treasury, which is the UK government’s economic and finance ministry that is also responsible for financial services policy, including banking and financial services regulation, financial stability and ensuring competitiveness in the City of London. Both DG FISMA and HM Treasury, respectively, may invite where appropriate:

a.    representatives from relevant EU and UK financial regulatory, supervisory and resolution bodies;
b.    in the case of DG FISMA, in relation to a specific issue, representatives from EU Member States;
c.    in the case of HM Treasury, other departments of the United Kingdom government; and
d.    other relevant experts, subject to prior approval by the participants, in relation to specific issues.

The Forum aims to ensure forward planning of regulatory cooperation to share knowledge, reduce uncertainty, enhance transparency, identify cross-border implementation issues (including concerns related to potential regulatory arbitrage by firms), working towards compatibility of each other's standards, and, when relevant, promote domestic implementation consistent with international standards.

More specifically, the MoU allows the Forum to:

• Promote prompt domestic application of international financial services regulatory standards.
• Share regulatory updates to identify cross-border implementation difficulties.
• Exchange views on the respective policies, rules and processes concerning deference regimes, such as equivalence, or other tools used to address cross-border issues.
• Discuss autonomous decisions to adopt, suspend, or withdraw equivalence relevant to one side.
• Discuss macroprudential and financial stability risks.
• Exchange perspectives on regulatory problems bilaterally, respecting supervisory and resolution authorities’ regulatory interests and including EU and UK supervisory and resolution authorities’ views.
• Share information about financial services sector money laundering and terrorism prevention activities.
• Discuss multilateral collaboration in specific areas and discuss positions on agenda issues before G20 or other international summits.
• Share information on the effectiveness of international standards oversight and enforcement.

So, what might be on the Forum’s agenda when it actually starts to meet? There is hope that some of the Forum’s priorities might seek to immediately address:

• How the EU may seek to further encourage euro denominated clearing activity into the EU and whether to extend UK central counterparty (temporary) equivalence arrangements beyond June 2025.
• How to align the EU’s and UK’s breadth of capital markets reforms in addition to Basel IV implementation and Solvency II reforms.
• What further measures are expected to give effect to the findings flowing from the European Central Bank’s desk-mapping review.

Case-by-case equivalence arrangements are due to be the basis for future EU-UK relations for the immediate to mid-term future, even if, so far, only UK-based CCPs have benefitted from a temporary recognition of equivalence. However, despite the planned tasks of the Forum, policymakers have noted that now that financial services firms have adapted to the new Brexit environment, there may be less demand on the industry side for reaching EU-UK equivalence agreements.

What next for EU financial services firms?

Crucially, in addition to the aspects discussed above, the MoU does not generate international or domestic legal rights or financial responsibilities. More importantly, Forum collaboration and discussion shall not prohibit either jurisdiction from pursuing regulatory, supervisory, or other legal measures it deems appropriate.

The Forum also does not foreshadow any easing on cross-border equivalence and given the EU’s approach to pushing supervisory principles on relocations and general strengthening of the EU’s Single Market since Brexit, is unlikely to reverse or ease the trend of UK and other non-EU headquartered institutions needing to assess their structural and other means of accessing the EU and the EEA.

Importantly, and perhaps rather politically but in practice for most rather unfortunately, the MoU’s text is equally less explicit when compared to the UK’s or the EU’s own agreements with other third countries (notably each sides’ efforts with the US) on pursuing mutual regulatory compatibility. Accordingly, progress to address questions on equivalence may be slow.

While the Forum may not perhaps be able to fix the post-Brexit issues as quickly as some might like, its future success may likely rest on whether the Forum’s dialogue can generate meaningful cooperation on the forward-looking regulatory agenda. This includes issues that are common to the UK and EU inasmuch as the wider G7 or G20 as well as the work of other internationally active fora namely, ESG and climate change, regulation and supervision of digital assets, AI, operational resilience and financial crime prevention. Close cooperation to align, or minimise fragmentation across UK and EU regulatory and supervisory frameworks in these thematic areas will be important for any established or new financial services firm doing business between the UK and EU in managing their long-term operating model.

Lastly, while the Forum is set to commence in the Autumn of 2023, its next meetings are likely set to take place while the EU is gearing up for the European Parliament elections (currently scheduled to be held on 6 to 9 June 2024) as well as against the backdrop of the terms of the Belgian and Hungarian six-month presidencies of the Council of the European Union (which is a co-legislator alongside the European Parliament) before Hungary hands over to Poland for January to June 2025 term. Unsurprisingly, EU policymakers focused on strengthening the integrity of the EU and equally of its Single Market (more generally as well as more specifically for financial services) will most likely want to ensure that the Forum is not inadvertently used as a means to advance more Eurosceptic priorities that could fuel rather than reduce fragmentation.

Outlook

In 2023 many financial services firms operating in both the UK and the EU are still facing challenges such as reduced market access, regulatory divergence and increased costs since Brexit. Those items are likely to persist for the immediate future as much of what the Forum is set to discuss involves a high degree of political positioning ahead of more technical and pragmatic policymaking and calibration of principles.

Despite the Forum’s existence and its aims and objectives, financial services firms will want to more so than ever before focus on tracking, triaging and tackling how legislative and regulatory policymakers’ proposals in the pipeline and efforts to calibrate or diverge existing sets of what were once common legislative and regulatory standards will evolve in the UK versus those in the EU. All of this will need to be benchmarked against concurrent developments and reforms in other global markets and the prospects of how the EU and separately the UK may access those global markets.  

Accordingly, while unfortunately it seems rather unlikely that financial services firms will see tangible benefits from the MoU in the short term in reducing some of the post-Brexit challenges, perhaps there is a promise that the Forum will serve as a means to tackle some of key issues that are common priorities for the EU’s and the UK’s respective Single Markets stemming from the forward-looking regulatory agenda. The Forum’s first test will be how it fares in its Autumn 2023 meeting and the published statements that may follow.

About us

PwC Legal is assisting a number of financial services firms and market participants in forward planning for changes stemming from relevant related developments. We have assembled a multi-disciplinary and multijurisdictional team of sector experts to support clients navigate challenges and seize opportunities as well as to proactively engage with their market stakeholders and regulators. Moreover, we have developed a number of RegTech and SupTech tools for supervised firms, including PwC Legal’s Rule Scanner solution for horizon scanning and risk mapping of all legislative and regulatory developments as well as sanctions and fines from more than 750 stakeholders in over 170 jurisdictions impacting financial services firms and their business.  

If you would like to discuss any of the developments mentioned above, or how they may affect your business more generally, please contact any of our key contacts or PwC Legal’s RegCORE Team via de_regcore@pwc.com or our website.