On 14 November 2018, Prime Minister Theresa May formally announced that a draft agreement had been reached with the EU on the UK’s withdrawal from the EU (the Agreement) – the UK is due to leave the EU on 29 March 2019.  The Agreement has been published alongside a Political Declaration setting out the framework for the future relationship between the UK and the EU.

This note only concerns the financial services aspects of the published documents. For a more broader high-level overview of the Agreement and Political Declaration, please see our Inside Brexit blog.

The Draft Withdrawal Agreement

With regards to financial services, the key takeaways from the Agreement are as follows:

• there will be a transitional period which will start on the date of the Agreement and end on 31 December 2020 (art 126);
• a joint committee of UK and EU representatives is established (art 161(1)) and may adopt a single decision before 1 July 2020 extending the transitional period up to a date as of yet undecided (art 132(1));
• during the transitional period, EU law will apply with respect to contractual matters, and certain EU regulations concerning the recognition and enforcement of judgments; decisions; authentic instruments; court settlements and agreements will continue to apply (art 66 – 67);
• unless otherwise agreed, EU law will be applicable to and in the UK during the transitional period (art 127), meaning the financial services passporting regime will remain in force;
• during the transitional period any reference to Member States in EU law, including as implemented and applied by Member States, shall be understood to include the UK (art 127(6)); and
• during the transitional period, the European Supervisory authorities and institutions will still hold the power conferred on them by EU law over the UK (art 131).

In terms of next steps, under s13 of the European Union Withdrawal Act 2018, a minister of the Crown must lay before Parliament a statement that a political agreement has been reached; a copy of the negotiated Agreement; and a copy of the framework for the future relationship. Following scrutiny, MPs will be expected to vote on a motion to approve both the framework for the future relationship and the Agreement. The Parliamentary Procedure Committee is still inquiring as to whether the Agreement can be subject to amendments. If the motion on the Agreement is approved, the Government would be expected to introduce the European Union (Withdrawal Agreement) Bill to Parliament to deliver to the promises of the Agreement. Any rejection of the Bill would prevent the Agreement being ratified. More information on the Parliamentary vote can be found on a recent House of Commons report, available here. A date for the vote is yet to be set.

The Political Declaration

The Political Declaration provides a high-level basis for future cooperation between the UK and the EU, including three concise bullet points on financial services. It is worth noting, that the Political Declaration on future ties between the UK and the EU is not yet finalised, Michel Barnier comments that it will be agreed by Tuesday 20 November. Our Global Head of Financial Services, Jonathan Herbst, has commented on the political declaration published by the Government alongside the Withdrawal Agreement:

While it is not legally binding, the declaration of political principles is significant in indicating the framework for negotiations. There are some principles for the development of the regime such stable markets and co-operation but these are set in the context of the autonomy of each side in its regime design. This is important as it reflects both the EU and UK positions that they cannot lose their freedom of action. It follows the approach of the UK Government’s White Paper while giving some more substance to the shared principles which will guide the parties in the use of their autonomy. There is a reference to the parties being able to take steps necessary for prudential purposes. This is a more worrying reference as the key question will be the certainty of any grant of equivalence of an ability to impose additional barriers. This will be an area to watch carefully in the upcoming negotiations.

One of the big concerns of the City has been the timing and substance of any grant of equivalence by the EU side. The picture here is mixed. On the timing, there is a clear commitment to work towards grant of equivalence by June 2020 which is designed to deal with the original concerns that the EU would not even start the process until the end of the transition period. On the scope of equivalence, the position is less clear. Equivalence is not stated as being limited to the current EU framework, e.g. as under Article 46 of MiFIR, but equally the possibility of a broader equivalence which might cover, for example, banking services is not ruled out. Also the text is silent on the timings and process for any withdrawal of equivalence. This looks like one of those areas which will need to be negotiated in the coming months.