What does the Brexit White Paper mean for the City and its European crown?

Anything could still happen: a soft brexit, a hard brexit, a new government, a parliamentary deadlock, or an EU rejection. Last week’s long promised Brexit White Paper, a 98 page blue print for the UK’s future relationship with the EU, thrashed out at Chequers, has already been savaged by Eurosceptic MPs, who have won amendments to its customs union and tax provisions.

The White Paper affirms the “nothing is agreed until everything is agreed” negotiating principle.  Assuming, and it is a big assumption, that the principles relevant to the City set out in the White Paper are agreed as the basis of our future relationship with the EU, what would this mean for the City and its European crown?

Financial institution access to the EU

If the least disruptive Brexit outcome for City financial institutions is to maintain existing passporting rights, then the White Paper disappoints. It kills off passporting with a stab: “the UK can no longer operate under the EU’s “passporting” regime, as this is intrinsic to the Single Market of which it will no longer be a member.”

Given repeated rebuttals and difficult to accept counter demands from the EU, maintaining passporting was a difficult if not impossible negotiation goal. The next best option of “Third Country Regime” access provisions has long seemed more attainable and practicable.

“Third Country Regime” or “TCRs” are regimes established under EU rules covering third country established firms.  Under existing EU law, TCRs provide rights of access below passporting for financial services, such as conducting certain regulated activities, providing wholesale investment or portfolio management services; or fund management services, without further authorisation requirements from an EU Member State.

The White Paper proposes something half-way between passporting and TCRs. Noting that the UK hosts all 30 of the global systemically important banks; as well as being home regulator for four of these institutions, it dismisses the TCR approach enjoyed by the US and Canada concluding, that “these regimes are not sufficient to deal with a third country whose financial markets are as deeply interconnected with the EU’s as those of the UK are.“.

It also raises additional concerns that a lack of means to conduct institutional dialogue between regulators, or maintain compatible rules; and a lack of sufficient reciprocal supervision cooperation tools, make a TCR approach unsuitable.

Instead the White Paper proposes a new financial services economic and regulatory arrangement with the EU in financial services: a sort of TCR+ arrangement.

Its starting point is that as at the end of the transition period (currently likely to run until the end of 2020), the UK and the EU will have  identical rules and matching supervisory frameworks. Therefore there should be reciprocal recognition of equivalence of all currently passported areas, at this point.

After that, positions may diverge, but there will be common objectives including promoting financial stability and preventing regulatory arbitrage.  This will be supported by regulatory dialogue, supervisory co-operation and a bilateral framework of treaty-based commitments, to satisfactorily maintain acceptable alignment of the different regimes.

This approach is pragmatic and realistic.  It is better than two of the other solutions, which ranked below passporting and TCR: establishing an EU branch or subsidiary.

Branch access is not currently available in all areas of financial services, and indeed has been rarely used. Depending on the number of jurisdictions where a firm does business, it could also be necessary to establish multiple branches.

Establishing an EU subsidiary could take advantage of existing EU passporting rights.  However, this advantage would be accompanied by the disadvantage of transferring all or some of the UK business to the EU subsidiary. Currently, most financial firms are establishing subsidiaries in other EU states, but whether these become substantive subsidiaries will depend upon the agreed nature of the TCR + approach.

Law firms and accountancy

The White Paper recognises the importance of legal services, quoting that the UK is the destination for 14.5 per cent of total EU legal services exports; as well as  accounting and audit services, noting that in 2016 UK firms provided over 14 per cent of EU27 audit and accountancy imports.

For law and accountancy, the White Paper proposes to permit the joint practice between UK and EU lawyers, and continued joint UK-EU ownership of accounting firms.

For audit and accounting equivalence, the White Paper provides that the UK will seek EU equivalence and adequacy decisions under the EU’s third country regimes by the end of the transition period.

Current EU rules provide that a judgment given in one Member State is enforceable in all other Member States, without taking further action.

So without further agreement, as the UK will no longer be an EU Member State, this reciprocal recognition will no longer directly apply to the UK. Arguably this could diminish the attractiveness of English law.

The current draft of the UK’s Withdrawal Agreement provides that, post Brexit, the UK and EU courts will be bound to respect jurisdiction clauses in favour of the EU and UK courts (respectively).  The White Paper goes further providing that “the UK is… keen to explore a new bilateral agreement with the EU, which would cover a coherent package of rules on jurisdiction, choice of jurisdiction, applicable law, and recognition and enforcement of judgments in civil, commercial, insolvency…matters”.

Mobility

The UK is to seek reciprocal arrangements allowing UK nationals to visit the EU without a visa for short-term business reasons. The UK also wants reciprocal provisions on intra-corporate transfers between UK and EU-based companies.

What about Clearing?

The paper is light on detail, perhaps necessarily so, however, with the EU pressuring a move of euro clearing post-Brexit to the eurozone, which could result in significant City job losses, clearing should have been addressed in the White Paper.

In conclusion, the White Paper proposes a much stronger and practicable position for the City than has generally been reported.  “Nothing is agreed until everything is agreed” though, and at the moment nothing is agreed, including by parliament, and we await the EU’s response with interest.

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