As negotiations about the UK EU Free Trade Agreement continue, the European Commission and Supervisory Agencies issued in July a series of communications aimed at Financial Services (FS) firms and wider stakeholders about preparing for the end of the Brexit transition period on 31 December 2020. The most important of these announcements concerns the Commission’s approach to taking regulatory equivalence decisions.
As a result, FS firms should review the extent to which their post-transition business plans rely on equivalence under the EU’s Markets in Financial Instruments rules (MiFIR and MiFID), and consider their alternatives. EU supervisors are clear that customers need to be informed in advance about the consequences of the end of the transition period for their business relationships.
The European Commission's Task Force on Relations with the United Kingdom (UKTF) released a communication dated 9 July, which includes an update to its strategy regarding equivalence assessments in FS. It reminds stakeholders that regulatory equivalence decisions can be withdrawn unilaterally at any time if regulatory frameworks diverge, that EU decisions are taken unilaterally, and are not subject to negotiation. The Commission said that it is awaiting responses from the UK to a number of questions it raised about the UK’s future regulatory framework, in order to conduct assessments to inform EU equivalence decisions. It also notes that the EU itself is establishing “a new, improved equivalence framework” for regulation of investment firms which will enter into force in mid-2021.
The paper then states that there are several areas where the Commission no longer intends to adopt an equivalence decision “in the short or medium term”. In footnotes (No. 21), it reveals that one of these areas is the Markets in Financial Instruments Regulation (MiFIR), Article 47, which governs the ability of a third country (i.e. UK) firm to provide investment services to EU professional clients and other eligible counterparties. Equivalence in this area has always been a key objective for the UK, and so this new position by the Commission represents a significant challenge - both for firms, as the EU encourages the movement of business to EU entities, and also more widely to the UK government, for leverage in the trade negotiations.
Whilst the nature of the communication and its timing suggest a tactical negotiating position, this nevertheless reminds firms that they should review their reliance on MifIR/MiFID equivalence in their post-transition operating plans. It is currently unclear whether, if a trade deal is successfully concluded, the Commission would adopt FS equivalence decisions before the end of the transition period.
In line with its 2018/19 planning for a no deal Brexit, the UKTF confirmed in the same communication that the central clearing of derivatives on UK central counterparties (CCPs) still presents financial stability risks for the EU, and so the Commission is again “considering” the adoption of a time-limited equivalence decision for the UK to mitigate this. It notes that the EMIR 2.2 Regulation, currently in the process of being adopted, will determine the measures necessary to mitigate the risks. The European Securities and Markets Authority (ESMA) wrote to Valdis Dombrovskis, Executive VP and Commissioner for Financial Services, on 8 July to clarify issues arising from the adoption of EMIR 2.2, and the role of ESMA in the assessment and ongoing supervision of equivalence.
ESMA’s own communication reminds firms that they should have fully implemented their preparatory measures to mitigate risks stemming from the end of the transition period. In particular, it reminds firms that they should have provided appropriate information to their clients on the consequences of the transition ending.
At the same time, ESMA confirmed that the MoUs agreed with the FCA in 2019 remain relevant, and will come into effect at the end of the transition period. This means that asset management firms can have confidence that fund delegation and outsourcing arrangements will continue to be accepted. They can plan on a worst case scenario that involves the marketing of funds to EU customers from an EU-based legal entity, which can then delegate and outsource key fund management activities back to the UK.
DG FISMA also issued a series of communications on 7 July. These summarise the risks and issues for firms, especially if the parties fail to agree on new trading arrangements. They make clear that the EU intends to enforce its FS rules and treat UK-based firms as third country firms from the moment the transition period ends on 31 December 2020. These communications represent a useful summary of the issues for each area of activity.
So, with equivalence determinations likely to be released only late in the negotiations, giving very little time to adjust and implement changes, financial services firms need to look again at how their end of transition plans may depend on equivalence, to ensure they - and their customers - can be ready for new ways of working.
Director, PwC United Kingdom
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