What does the signing of the Trade and Co-operation Agreement deal (TCA) mean for UK Financial Services? Paul Wilson takes a look under the bonnet of the 1,246 page document and tries to work out exactly what it might mean for those of us still scratching our heads as to what the future for Financial Services in the UK might look like.
In the run up to Christmas 2020, undoubtedly you will remember all that ‘will they or won’t they?’ speculation about whether the UK would arrive at New Year’s Day with no trade agreement at all. There were also significant doubts about what the final shape of an agreeable deal might look like, should HM Government manage to get one over the line. Most would agree that 1.44pm on Christmas Eve was cutting it a little fine, but the deal got done.
At present, for the average IFA, there is little change. The Covid-19 crisis continues to take prominence in the news, on the markets and economy. The general public were not particularly aware that that the trade deal doesn’t cover financial services. In normal times, the potential consequences of this would have been debated around the clock on the news channels, but 2020 was not a normal year. So what does “No (financial services) Deal” actually mean for UK Financial Services?
EU regulations and ‘equivalence’
The reason for Financial Services being excluded from the trade deal is in part complexity, but principally down to regulations. The EU insists that any third country trading in EU Financial Services follows equivalent rules to the EU. There is some ambiguity about what ‘equivalency’ might mean.
At the centre of the storm that has been gathering is the EU’s refusal to recognise the UK’s regulatory systems are ‘equivalent’ to its systems. This may seem surprising given that we had been fully compliant with the EU’s regulatory systems as a member, or at least as a transitioning one.
However, it is not the past or even current compliance that is at issue, but the UK’s ability to diverge from the EU regulatory path going forward that is problematic for Brussels. Is that stance likely to change? ‘Unlikely’ thinks Andrew Bailey, Governor of the Bank of England.
Although both sides have agreed to continue discussions to find a suitable compromise to work with on UK access to EU financial markets, the hard fact is that since 11pm on the 31st of December 2020, the UK is an external country and no longer has the same access to EU markets which it enjoyed as an EU member.
When the markets opened in this new world in January, trading in EU shares amounting to EUR6.5 bn a day departed London permanently, to the immediate benefit of the Exchanges in the EU. This was an immediate and visible short term blow. Although the numbers look big relative to the key euro-centric market revenue generator the clearing activity of euro-denominated derivatives which is heavily centred on London based exchanges, in relative terms it is chicken-feed.
Thanks to a short term compromise the euro-derivatives clearing activity has been able to continue in London. For now.