The EU and the UK have agreed the text of the Memorandum of Understanding (MoU) that creates a framework for voluntary regulatory co-operation on financial services.

However, regulatory developments since the UK left the EU underline that firms working in both the EU and the UK will need to monitor closely regulatory change in both jurisdictions, to pre-empt disruption to their business and remain compliant.

The MoU will establish the Joint UK-EU Financial Regulatory Forum, which will facilitate dialogue on financial services issues. Like the EU-US Forum, it will meet twice a year and on other occasions when deemed necessary.

As reported in recent Bank of England, Financial Policy Committee (FPC) minutes (PDF 1.37 MB), UK authorities remained committed to mutual regulatory and supervisory co-operation with the EU authorities. They conclude that, alongside co-operation with other regulatory authorities globally, this will continue to promote an open and resilient financial system to the benefit of all participants. The FPC also judges that such mutual co-operation is necessary to manage financial stability risks.

The European Commission's strategy is to promote openness in the EU's economy and financial system, but to be open to the world, it perceives it needs to be “strong and resilient at home”, including improving the resilience of EU financial market infrastructure.

State-of-play on equivalence

Related to this, and one of the most sensitive areas in the EU-UK financial services relationship, is the EU's temporary equivalence and recognition decisions for UK Central Counterparties (CCPs), which expire on 30 June 2022. Before then, European Securities and Markets Authority’s (ESMA's) CCP Supervisory Committee will undertake a technical assessment of whether the services provided by the two UK CCPs are of a systemic nature that is too substantial to be safely provided from outside the EU. ESMA is currently defining a framework for the assessment of the relevant systemic risks and supervisory implications, taking into account the costs and benefits that may result from a potential relocation of clearing services.

The UK has on-shored the European Markets Infrastructure Regulation (EMIR), which governs CCPs. The proposed expanded CCP resolution regime, currently being consulted upon by HM Treasury, is similar to the EU regime apart from a few technical areas. It will be for the Commission to decide whether these technical differences will impact their decision to grant further equivalence from July 2022.

More widely, indications from the European Commission are that there will not be any immediate granting of further equivalence decisions beyond the two existing time-limited decisions on derivatives clearing and securities settlement. Some national regulators issued temporary equivalence decisions on the UK to bridge the gap and it is not known if these will be continued or fall away. For example, the Luxembourg’s CSSF's announcement in relation to Markets in Financial Instruments Regulation (MiFIR) for services provided to Luxembourg eligible counterparties and per se professional clients, without opening a branch, will fall away if the EU issues an equivalence decision. The Italian securities regulator CONSOB's decree (PDF 278 KB) allowing UK banks and investment firms to continue to operate in Italy while they seek authorisation expires on 30 June 2021.

Impacts on firms and markets

In the meantime, firms and markets have begun to adapt. The application of the EU MiFID II share trading obligation resulted in around EUR 6 billion in daily average share volumes leaving London in January, mainly moving to Amsterdam. Similar movements have also happened in derivatives trading; for example, the UK's trading share of euro rates swaps has fallen from 40 percent to 10 percent since January.

The position for UK asset managers remains uncertain. Without an equivalence decision under MiFID II by the Commission on the UK, firms have to consider the evolving position in each member state. And while provision of portfolio management services by third-country firms to EU funds currently requires only co-operation agreements, the reviews of the Alternative Investment Fund Managers Directive (AIFMD) and the Undertakings for the Collective Investment in Transferable Securities Directive (UCITS) could herald changes, in rules or supervisory expectations. MiFID firms also need to review the position of sales or marketing personnel based in the UK but operating in the EU.

Continuing alignment or divergence?

The regulatory frameworks in both jurisdictions are under review. John Berrigan, Deputy Director General of Financial Stability, Financial Services and Capital Markets Union recently outlined the Commission's 2021 priorities, which include reviews of five major pieces of the EU regulatory framework: MiFID II/MiFIR, Capital Requirements Directive and Regulation (CRD/CRR), Bank Recovery and Resolution Directive (BRRD) Solvency II and AIFMD.

The UK is beginning to outline its future review plans, indicating both continuing alignment and divergence from EU regulation. The UK FPC has stated that it remains committed to the implementation of robust prudential standards, maintaining a level of resilience that is at least as great as that currently planned, which would exceed that required by international standards. However, the UK will work to its own timeline, as shown by the recent decision to extend the implementation date for Fundamental Review of the Trading Book (FRTB) Standardised Approach reporting by UK banks to January 2022, rather than imposing the EU deadline of September 2021.

The Financial Conduct Authority (FCA) has indicated that it will match MiFID II changes made by the EU as part of the Capital Markets Recovery Package. An FCA consultation shortly to be released will propose “a similar set of changes - not absolutely identical” to the EU changes. On the MiFID II transparency regime, the FCA has already made it clear that it will not apply the double volume cap to dark trading of all equities traded in the UK, expanding from its original scope of only UK-listed equities, unless it sees harm to price formation or execution outcomes for investors. The FCA will allow the Securities Financing Transaction Regulation (SFTR) regime to mature before it proposes any further divergence from the EU regime (non-financial companies are not in scope of UK SFTR, unlike the EU SFTR). However, the FCA recognises that “divergence between two regimes could add additional complication of cost to groups who would then have to adhere to two different set of reporting requirements”. In the insurance sector, the European Insurance and Occupational Pensions Authority (EIOPA) submitted its final advice to the Commission on the Solvency II review in December and the Commission is expected to publish a proposal in Q3 2021. The Prudential Regulation Authority (PRA) has announced that its review will stay true to the basic principles of Solvency II. Broadly, the regime has served the UK well, as demonstrated through the pandemic, but the PRA believes the regime is over-specified and needs tailoring in places, particularly on the life side. The UK Investment Firms Prudential Regime closely mirrors the new EU Investment Firms Directive and Regulation (IFD/IFR). On the other hand, the UK has no plans, in the short term, to introduce sustainable finance rules mirroring the EU Sustainable Finance Disclosures Regulation, Taxonomy Regulation or amendments to other existing regulations impacting asset owners and asset managers. And looking further forward, firms may need to navigate differences in new areas of regulation, such digital operational resilience, crypto-assets and an EU Green Bond Standard.

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