The Impact of UK/EU Trade Deal on Financial Services and Services Industry
Introduction
The recent implementation of the UK-EU Trade and Cooperation Agreement (TCA) has generated significant discussion, particularly regarding its impact on the financial services sector and the broader services industry in the UK. This article explores the nuances of the TCA's implications for these sectors, addresses common misconceptions, and provides an overview of the current and expected future landscape.
Understanding the Financial Services Industry in the UK
Financial services play a critical role in the UK economy, contributing approximately ￡35 billion and accounting for 80% of the services sector. With an estimated 6.9% of UK GDP attributed to the financial services industry, it is a cornerstone of the national economy. Exports to the EU in 2019 amounted to ￡26 billion, representing 21% of service exports to the EU.
The EU/UK Trade and Cooperation Agreement (TCA)
The TCA, while ambitious, does not explicitly include measures to accommodate the financial services sector. Passporting rights, which previously allowed UK financial services firms to operate across the EU without significant regulatory hurdles, ceased to exist from January 1, 2021. This development has sparked debate and concern among financial service providers and industry stakeholders.
Equivalence and Non-Passporting Access
The lack of direct access to the EU market has led to discussions about equivalence. The EU grants access to foreign financial firms if they are deemed to have regulations equivalent to those of the EU. Although equivalence has not been formally negotiated as part of the TCA, the agreement still offers the possibility of favourable equivalence decisions for UK financial services firms. The TCA includes a non-binding Joint Declaration on cooperation in financial regulation and aims to facilitate a Memorandum of Understanding (MoU) by March 2021. This MoU will likely include similar commitments from the EU as with financial services in the US and Japan.
The Temporary Permissions Regime for EEA Firms
A Temporary Permissions Regime has been implemented to support EEA-based firms operating in the UK. This regime ensures that EEA firms can continue to operate under existing licensing conditions, providing a smoother transition during the adjustment period.
Considerations for Market Access
EU firms recognize the importance of the City of London as a top global financial centre. Despite repeated attempts by EU members to shift financial activities to Paris or Frankfurt, these efforts have not been successful, and London remains a major player in the global financial market. The Z/Yen Group's Global Financial Centres Index (GFCI) evaluates factors such as business environment, human capital, infrastructure, financial sector development, and reputation. London consistently ranks among the top three global financial centres, making it an exceptionally valuable asset for international financial firms.
Conclusion and Misconceptions
The TCA, while not explicitly covering financial services, does offer opportunities for equivalence and cooperation. Despite the loss of passporting rights, UK financial services firms are enhancing their presence in European cities like Paris, Frankfurt, Amsterdam, and Dublin. This diversification helps mitigate the impact of the TCA and ensures continued market access.
It is crucial to avoid misinterpretations of the TCA's implications. While some may question the EU's stance, equivalence, and market access, the TCA's provisions provide a framework for regulatory cooperation and potential future access. Many of the apprehensions surrounding the TCA are misguided; therefore, a deeper understanding of the agreement's terms and implications is essential for stakeholders in the financial services industry.