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Equivalence and the financial services content of the draft UK-EU free trade agreements

  • United Kingdom
  • Brexit
  • Financial services and markets regulation



The UK and the EU have both released draft texts of their preferred form of the UK-EU free trade agreement (“FTA”).  Both texts contain sections on financial services.  The EU released their text first and the subsequent UK text borrows elements from and builds upon the EU text.

Both texts operate on the basis that the principal means by which trade in financial services will be facilitated is under the UK and EU’s unilateral equivalence regimes, under which each party retains the final decision as to whether it permits the other party’s financial services terms limited access to certain parts of its financial services markets.  These regimes are applicable to any third country, and what is on offer is little different from what would apply to financial services on a no-deal Brexit.

The EU’s equivalence regimes are set out in existing financial services legislation.  The UK has onshored those EU financial services regulations, including the equivalence regimes, under the European Union (Withdrawal) Act 2018 (“EUWA”) and so has its own, identical, equivalence regimes.  At the same time that the UK and EU signed the Withdrawal Agreement (“WA”) in January 2020 they entered into a non-binding Political Declaration (“PD”).  In Paragraph 36 of the PD there is a non-binding commitment by the UK and EU to endeavour to make equivalence assessments (but not actual findings) in respect of each other’s financial services regimes before the end of June 2020, a deadline which has now passed without such assessments being made. 

Both the UK and EU draft FTA texts provide for only a limited deal on financial services in the FTA itself.  However, the UK envisages that limited deal to be somewhat more extensive than the EU does.  How much more extensive is a matter of dispute between the parties.  The EU has rejected the UK’s proposals as “unacceptable”.  However, because those proposals will inform the shape of the continuing negotiations between the parties, we consider them in this briefing.

UK text of the UK-EU FTA and Annexes.

EU text of the UK-EU FTA.

The coming end of the Transitional or Implementation Period

In accordance with the terms of the WA, following formal legal Brexit on 31 January 2020, the UK entered a Transitional or Implementation Period (“TIP”), during which the UK remains subject to the burden and benefit of all EU law as if it remained a member state of the EU save that the UK has no say in any of the legal bodies of the EU, including the European Supervisory Agencies (“ESAs”) and the Court of Justice of the EU (“CJEU”).  The TIP comes to an end on 31 December 2020.  Under the PD it was open to either of the UK or the EU to request an extension, but neither did, with the UK Government legislating to prohibit its ministers from requesting an extension.  As a result, on 31 December, Implementation Period Completion Day (“IPCD”), the UK will leave the legal ambit of the EU. 

If no free trade agreement has been agreed by IPCD, the UK and EU will revert to trading on WTO terms supplemented by a handful of discrete side agreements, which is generally known as “no-deal Brexit” and which the UK Government refers to as trading on Australian terms.  These discrete side agreements mostly refer to technical transport and customs matters such as cabotage and are of no relevance to financial services.  However, the UK has acceded to the Single Euro Payments Area (“SEPA”) which will ensure that UK financial services institutions will be able to continue to make payments and  transfer funds in euros freely across the UK-EU border.

The time available for agreeing and ratifying a trade deal by IPCD is tight and with financial services a significant point of disagreement between the parties, any deal which is reached by IPCD is unlikely to make provision for financial services beyond the minimal approach in the EU’s draft of the FTA.

Equivalence regimes

Both the UK and the EU have a range of over 40 individual equivalence regimes in their financial services regulation, which the EU groups into 28 heads.  The most significant are:

  • Article 30 of the Benchmarks Regulation
  • Article 5 of the Credit Rating Agencies Regulation (“CRAR”)
  • Article 25 of the Central Securities Depositories Regulation (“CSDR”)
  • Articles 75 and 77 of EMIR
  • Articles 46 and 47 of MiFIR
  • Article 30 of the Prospectus Regulation
  • Article 19 of the Securities Financing Transactions Regulation (“SFTR”)

The UK and EU financial services regimes start out as essentially identical.  The EUWA onshores EU financial services regulation into UK law as it stood, subject to secondary legislation which amends that regulation so that references to an EU institution become references to a UK institution and other consequential amendments to ensure that the mechanics of those regulations continue to work.  The UK Government has taken pains to stress that there is no intention in the onshoring process to effect any change of policy during the onshoring process, beyond giving effect to the UK’s departure from the EU.

The Chancellor of the Exchequer, Rishi Sunak, said in a written ministerial statement (dated 23 June 2020):

“The Government continues to believe that comprehensive mutual findings of equivalence between the UK and the EU are in the best interests of both parties and we remain open and committed to continuing dialogue with the EU about their intentions in this respect.”

The EU submitted 1,000 pages of questions to the UK in 28 separate equivalence questionnaires, only delivering the final 248 pages of questions on 25 May, less than 5 weeks before the 30 June deadline for making the assessments.  By 30 June the UK had only completed 4 of the 28 questionnaires, so there was no possibility of the EU completing its assessment by that date (although the UK Government has said it is still working hard on the responses).  We now know how that the UK Government has completed its equivalence assessments of the EU’s financial regulation.  It is generally assumed that on a technical basis the UK will find the EU equivalent across the board.  However, City Minister John Glen told the House of Lords Select Committee on the European Union that “I do not think anyone would expect us unilaterally to make that decision known in the context of the EU not completing the process.  It has not even finished that process yet.” (in the answer to Q17 on p26 of the transcript)

In a speech on 30 June, Barnier emphasised the political nature of the EU’s equivalence decisions,

“And so, we will only grant equivalences in those areas where it is clearly in the interest of the EU; of our financial stability; our investors and our consumers.” [emphases from the original].

It is unclear whether the UK will take the view that free trade is a boon even when unilateral or whether it too will take a political approach, which could lead to tit for tat denial of equivalence notwithstanding the UK and EU have essentially identical regulations.

Even if the UK and EU make findings of equivalence, both equivalence regimes permit those findings to be withdrawn on 30 days’ notice without cause.  Clearly there are significant risks for financial services businesses in making arrangements to conduct cross border activities where the permission to do so could be arbitrarily withdrawn at a month’s notice.

The start of divergence

In his written ministerial statement, the Chancellor announced a number of matters in which the UK intends to diverge from the EU in respect of the processes by which it delivers certain shared financial services regulatory policy outcomes, while retaining the same policy outcomes as its goal.

“The UK played a pivotal role in the design of EU financial services regulation.  The Government remains committed to maintaining prudential soundness and other important regulatory outcomes such as consumer protection and proportionality.  However, rules designed as a compromise for 28 countries cannot be expected in every respect to be the right approach for a large and complex international financial sector such as the UK.  Now that the UK has left the EU, the EU is naturally already making decisions on amending its current rules without regard for the UK’s interests. We will therefore also tailor our approach to implementation to ensure that it better suits the UK market outside the EU.”


The UK will not be implementing settlement discipline regime set out in the EU’s Central Securities Depositories Regulation (“CSDR”), which is due to apply in February 2021.  UK firms should instead continue to apply the existing industry-led framework.


The UK will not be incorporating the reporting obligation of the Securities Financing Transactions Regulation (“SFTR”) for non-financial counterparties, which is due to apply in the EU from January 2021, into UK law.

EMIR Refit Regulation

HM Treasury (“HMT”) will publish legislation to complete the implementation of the Regulation amending the European Market Infrastructure Regulation (“EMIR”) to improve trade repository data and ensure that smaller firms are able to access clearing on fair and reasonable terms.


HMT will amend the Benchmarks Regulation (“BMR”) to ensure continued market access to third country benchmarks until the end of 2025.  It will publish more information in July 2020.


HMT will amend the Market Abuse Regulation (“MAR”) to confirm that both issuers and those acting on their behalf must maintain their own insider lists, and to change the timeline issuers have to comply with when disclosing certain transaction undertaken by their senior managers.


HM Treasury plans to amend the UK's packaged retail and insurance-based investment products (“PRIIPs”) regime and address potential risks of consumer harm.  It is expected that the UK will abandon the heavily criticised PRIIPS KID in favour of an appropriately modified version of the successful UCITS KIID.  It will publish more information in July 2020.


To minimise uncertainty, the Government and the PRA and the FCA propose to introduce the new Investment Firms Prudential Regime (“IFPR”) and updated rules for credit institutions in line with the intended outcomes of the EU’s Investment Firms Regulation and Directive and the second Capital Requirements Regulation.  The Government and the PRA do not intend to require PRA-designated investment firms to re-authorise as credit institutions, unlike the EU regime.


The UK already has in place a minimum requirement for own funds and eligible liabilities (“MREL”) framework in line with international standards.  The deadline in Bank Recovery and Resolution Directive II (“BRRD II”) for institutions and entities to comply with end-state MREL requirements is 1 January 2024.  “Given this is after the end of the Transition Period, it is right that the UK exercises its discretion about whether to transpose those requirements.”  At the time of writing, the UK Government has not indicated how it intends to exercise that discretion.

Solvency II

HMG plans to review certain features of Solvency II to ensure that it is properly tailored to take account of the structural features of the UK insurance sector.

LIBOR transition

The Financial Services Bill will amend the Benchmarks Regulation 2016/1011 as amended by the Benchmarks (Amendment) (EU Exit) Regulations 2018, to ensure that FCA powers are sufficient to manage an orderly transition from LIBOR.

See our client briefing on divergence in the regulation of derivatives “UK regulation of derivatives to become less… derivative”.

The consequences of divergence

The scale of the divergence announced, which involves achieving shared policy outcomes by different processes, doesn’t amount to significant divergence.  The EU has recognised as equivalent third country financial regulation in which such shared regulatory outcomes are achieved by substantially more divergent regulations than UK regulation is or will become under these plans.  However, the EU’s process for making (and withdrawing) equivalence decisions is not purely or even mainly a question of technical equivalence.

If the EU is looking for a pretext by which to justify withholding a finding of equivalence for the UK in respect of some or all of its financial services equivalence regimes, the divergence the Chancellor has announced provides that pretext.

Comparison of UK and EU FTA drafts

The EU’s recent model for financial services content in FTAs, including those with South Korea, Canada and Japan, is the same limited provision in the FTA and equivalence model which it is offering the UK.  At the start of the negotiations, under the May administration, initially the UK was asking for a comprehensive agreement on financial services to be contained in the free trade agreement.  That ambition has been successively scaled back, with each less ambitious proposal rejected by the EU.  Even so, the UK’s current demands in respect of financial services as set out in the UK’s draft FTA, while very limited compared with the passporting rights afforded under EU membership or the UK’s initial demands, would be a new departure for the EU and go further than ever before.

Responding to the UK’s text, in a speech on 30 June, Michel Barnier said,

“Our proposals would give UK operators legal certainty that they would not face discrimination when establishing themselves in the EU.  And the same for EU operators in the UK.  The UK, however, is looking to go much further.  I will be blunt: its proposals are unacceptable.”  [emphasis from the original]

Michel Barnier gives two main grounds for rejecting the UK’s proposals:

First, that they would limit the EU’s regulatory and decision-taking autonomy by:

  • creating a Financial Services Committee (Article 17.18), which Mr Barnier describes as “a legally enforceable regulatory cooperation framework on financial services”;
  • attempting to frame the EU’s process for withdrawing equivalence decisions by requiring consultation prior to withdrawal; and
  • limiting the scope of the prudential carve out.

Second, that they would make it easy to continue to run EU businesses from London, with minimal operations and staff on the continent.

While there is truth in the first ground, in particular that the UK is seeking to make the withdrawal of equivalence a negotiated process as opposed to something which can be done on 30 days’ notice without cause, the second ground is without foundation in fact, as ESMA and national regulator rules on substance already prevent non-EU financial services firms from setting up “letterbox” companies which delegate all their functions back to a parent or other group company in a third country.

This table runs through the main differences between the proposed texts.

For what outcome should financial services firms prepare?

Whether or not there is a deal in place on 31 December 2020, the best outcome for UK financial services firms seeking to sell into the EU27 will be if the EU makes across the board equivalence decisions in respect of the UK.  Even if such equivalence is found, the equivalence regimes are partial and limited and can be withdrawn without reason at one month’s notice.  This does not seem to be a stable basis on which to carry on a cross border financial services business.  Firms should maintain and improve their no deal plans and the arrangements they have made to separate their UK and EU27 business.

Whether or not there is a deal in place on 31 December 2020, the best outcome for EU27 financial services firms seeking to sell into the UK will be that the UK makes across the board equivalence decisions in respect of the EU.  While the UK government has given the impression that it will take a less arbitrary approach to the granting and withdrawal of equivalence and that it wants to provide greater certainty, the onshored equivalence regimes give the UK exactly the same powers and discretions as the EU to decline to make such findings. 

Even if such equivalence is found, the equivalence regimes are partial and limited and can be withdrawn without reason at one month’s notice.  This does not seem to be a stable basis on which to carry on a cross border financial services business.  Firms should maintain and improve their no deal plans and the arrangements they have made to separate their UK and EU27 business.

In respect of EU27 firms wanting to continue to sell into the UK, there is the UK temporary permissions regime which provides a pathway to UK authorisation for EU27 firms which have registered for the TPR.  The window for doing so reopens on 30 September 2020.  For further guidance on the TPR, read our client briefing “FCA announces re-opening of TPR notification window in September”.

For UK firms wanting to continue to sell into EU27 countries, please see our country by country guide “Helping you through changing times: Our European Brexit tracker for financial services institutions”.

How Eversheds Sutherland can help

Since June 2016, our lawyers and consultants have advised various institutions passporting into the UK from EU27 Member States and passporting from the UK into the EU27 on Brexit planning and Brexit related issues.

We would be happy to discuss how we can help you with your Brexit planning and execution of those plans. 

Our European Brexit tracker provides a quick overview of the current position in relation to UK funds and UK fund managers seeking to sell services into EU27 countries after Brexit.

To see our client briefings on the wide range of implications of Brexit, visit our Brexit hub.