Big Bang 2.0: unlocking the mystery of post-Brexit financial services


The UK has one of the largest financial systems in the world. However, since Brexit, UK imports of financial services from the EU have declined and hundreds of banking and financial organizations have left the UK and relocated to the EU. As a result, the government is doing all it can to make the UK, and the city in particular, look more competitive to international businesses. One of the main areas of interest is the overhaul of the UK’s financial regulatory framework: the government is considering repealing EU rules in favor of the attribution to national regulators, the Prudential Regulation Authority (PRA ) and the Financial Conduct Authority (FCA), powers necessary to regulate the sector. .

In this article, we examine the post-Brexit regulatory landscape and explore what the UK’s future relationship with the EU might look like for the financial services sector.

What has happened so far?

Pre-Brexit times were certainly simpler for the UK. As all EU member states are part of the EU single market, businesses have been able to establish themselves freely and over time common standards of financial regulation and supervision have been established across the EU . Today, when a bank or financial services company is established and licensed in an EU country, it can apply for the right to provide certain defined services throughout the EU, with relatively few licensing requirements. additional authorization. This pan-European authorization is known as the “passport” for financial services.

Early in the Brexit process, the UK had hoped to broker a bespoke financial services deal to retain some of the benefits of the passport. However, the EU was not willing to offer this. As a result, the UK-EU Trade and Cooperation Agreement (ATC) was drawn up which unnecessarily contains only a few provisions on financial services, leaving trade to be managed by unilateral mutual decisions. of “equivalence”.

Equivalence is a system that can be used to grant domestic market access to foreign companies in certain areas of financial services. It is based on the principle that the countries where these companies are based have regulatory regimes that are “equivalent” in terms of outcomes. A country may therefore decide to grant a foreign financial services company access to its domestic market on the grounds that the country of the foreign company has equally strict regulations for the market with which it trades. Unlike passport access, equivalence means that either party can terminate the other’s market access with 30 days notice.

By the end of the transition period, the UK had replicated much of the EU equivalence framework in national law. As of January 2021, the UK had granted the EU 27 equivalence orders allowing EU financial firms to access parts of UK financial markets. However, although the EU has recognized the regulatory regimes of other third countries as equivalent, it has not yet taken an equivalence decision for the United Kingdom (apart from two temporary decisions granted at the end of of the transition period, one of which has already expired). This means that UK companies’ access to EU markets now depends on the rules that each member state applies to companies from third countries.

The passport was not perfect: despite supposedly common rules, there were differences between regulators in how they applied them, and some aspects of business were not addressed in EU law, leaving each member state free to set their own rules. However, its main advantage was, of course, the now lost one-time authorization requirement for UK companies wishing to do business in or to the EU, and for EU companies wishing to access UK markets.

What are the government’s plans?

Despite these challenges, the government’s ambitions for the UK financial services sector after Brexit have not been dampened. In July 2021, the Chancellor used his speech at Mansion House (and the accompanying document – A New Chapter for Financial Services) to set out a vision for the sector and what he hails as a “Big Bang 2.0” for the City of London after Brexit. . The Chancellor outlined the ambitious reforms the UK is undertaking to ensure that the financial services industry can lead the industry both domestically and internationally and focused on the following key areas:

  • Regulation – although no equivalence decision has been made between the UK and the EU, the Chancellor said the EU would not be able to deny access to the UK indefinitely and that the intention now was for the UK to strengthen its existing scheme
  • Global ambition – the government intends for the UK to remain an ‘open and global financial centre’ and the Chancellor cited UK plans to forge new relationships with other third countries outside the UK EU, in particular Singapore, the United States and Switzerland
  • Technology – the financial services sector in the UK will be supported by new technologies and the possibility of a new digital currency
  • The environment – the Chancellor also discussed plans for the UK to focus on green finance and he challenged the UK to be the world’s first net zero aligned financial centre.

Building on plans presented by the Chancellor, in November 2021 the UK Treasury presented proposals to reform the UK’s financial services regulatory framework to ensure it is fit for the future by establishing the Future Regulatory Framework Review (FRF Review). The proposals largely involve abandoning EU regulation in favor of a local regulatory framework. The consultation examines the overall approach to financial services based on the existing Financial Services and Markets Act 2000 (FSMA) model and concludes that the FSMA model remains the most appropriate way to regulate financial services in the UK. However, the proposals put forward by the Treasury signal a change in the relationship between the Treasury and the PRA and FCA and include the addition of ‘new growth’ and ‘international competitiveness’ as secondary objectives for regulators to pursue.

Other key points and proposals from the FRF review include:

  1. Amendments to existing principles to ensure sustainable growth consistent with the commitment to a net zero economy by 2050
  2. A new “designated activities” regime to allow regulation of certain activities outside the FSMA and the FSMA 2000 (Regulated Activities) Order 2001, for example, to maintain current EU-derived controls on short selling
  3. Additional controls and accountability for regulators
  4. A relaxation of Solvency II capital requirements for the insurance sector to free up money for businesses to invest
  5. A change to stock listing rules to make London a more attractive destination for tech start-ups to go public
  6. Regulations to ensure that consumers and businesses continue to have access to cash in an increasingly cashless society, within reasonable distances.

Read our full analysis of the FRF review here.

What else is going on?

In January 2022, Brussels announced its intention to consult on a possible extension of its current equivalence decision for UK clearing houses, allowing EU banks to clear transactions through them for another 3 years until 2025. However, nothing has come of it yet. The longer the EU takes to grant equivalence rulings, the less value it will have and the more likely the UK’s attention will shift to more emerging international markets.

In addition, the European Affairs Committee recently launched an investigation into:

  • The impact so far of the UK’s exit from the EU single market on the UK financial services sector
  • The impact of the lack of a functional framework for regulatory cooperation between the UK and the EU
  • The future of cross-border trade in financial services between the UK and the EU in the absence of equivalence
  • The impact of regulatory divergence and agreements with third countries on trade in financial services between the UK and the EU.

The Committee expects to deliver its report by May 2022.

UK regulators are also working hard to maintain regulatory and supervisory cooperation, including data sharing, to effectively oversee international companies operating in the UK after Brexit. The PRA has signed MoUs with almost all EU Member States and with European supervisory agencies including EBA, ESMA and EIOPA. The Bank of England is also in daily conversation with its counterparts in the US, EU and other jurisdictions to convince them that the UK’s financial market infrastructure is of a standard at which they ( and their financial institutions) can be trusted.

Future uncertainty?

The world is waiting for the UK government to exercise its regulatory powers and give the UK a strong but reasonable regulatory environment to attract international business. The Treasury concluded the consultation phase of its review of the FRF on 9 February 2022 and the Chancellor has confirmed that this package of measures will be included in the next Queen’s Speech later this year.

Many see this waiver of EU regulations as a positive step towards regaining control of the UK’s regulatory regime, seizing new opportunities and allowing national regulators to achieve their regulatory goals on their own terms. However, there are also concerns that such an overhaul could put pressure to lower standards and move towards a lighter form of regulation, although the FCA and PRA remain firm believers that long-term growth and competitiveness are not achieved by having low standards. And, even if high standards are maintained, will any deviation from EU standards, whether resulting in equal or stricter requirements, make it less likely that the EU will consider a decision to equivalence?

As the world waits for the ‘Big Bang 2.0’, there is still uncertainty about the future and what any separation from EU financial services regulation will mean for the UK. Does the government’s push for an overhaul of UK financial services regulation actually signal an abandonment of UK equivalence hopes? Is it worth taking that risk in order to remove some of the parts of UK regulations that stem from less popular EU requirements in favor of what UK regulators see as equally high but better standards of regulation tailored to UK financial institutions, markets and consumers? Whatever the developments, there is no doubt that they will shape the work of regulators and the UK financial services landscape for years to come.


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