The government sets out a bold and ambitious arrangement for financial services, including free market access and a new Financial Services Committee.

By Rob Moulton and Anna Lewis-Martinez

On 19 May 2020, the UK government published draft legal texts of 12 documents, and an accompanying letter, setting out its approach to the UK’s future relationship with the European Union, including its outline of a UK-EU Free Trade Agreement (FTA). The proposed FTA is nearly 300 pages long and includes a chapter on financial services. The European Commission published its version of an agreement two months ago, and the UK’s draft FTA seems only to highlight the significant differences between the two sides.

The financial services section of the proposed FTA is contained in Chapter 17 and marks the first time that the government has spelt out clearly its expectations for financial services in the UK’s future relationship with the EU. Key financial services elements to note in the draft FTA include:

Cross-Border Financial Service Suppliers

The UK has set out some ambitious demands for allowing continued access for UK financial services to provide uninterrupted cross-border financial services. The draft FTA states that both the UK and the EU “shall permit persons located in its territory, and its nationals wherever located, to purchase financial services from cross-border financial service suppliers of the other Party located in the territory of that Party”. The treatment given to financial services and cross-border financial service suppliers of the other Party is to be no less favourable than the most favourable treatment given by that government to its own like financial services and financial service suppliers. Additionally, no limitations or restrictions will be applied to market access for UK or EU financial service suppliers located in the relevant territory. The supply of a new financial service by a UK or EU financial service supplier is also permitted, although the institutional and juridical form through which the new financial service may be supplied can be determined and may require authorisation for the supply of the service from the relevant regulator.

Whilst the UK is essentially seeking full single market access as a non-EU Member State, the EU’s approach is to have limited market access commitments, notably on cross-border supply of financial services. In addition, even where there is market access, the EU will continue to apply its host state-rules to incoming providers.

Financial Services Committee

In the draft FTA, the UK government proposes a new Financial Services Committee (FSC) to resolve financial services disputes between the UK and the EU. The FSC will supervise the implementation of the financial services chapter of the FTA; assess the functioning of the FTA as it applies to financial services; consider issues regarding financial services that are referred to it by the UK or the EU; and carry out such functions as are conferred on it by the Annex to the draft FTA on Regulatory Cooperation. This proposal is in stark contrast to the EU’s approach of a general framework that applies to all third countries.

In summary, the gulf between the two proposals is significant and the two sides could not be further apart. The EU intends to retain the existing architecture and restrictions of financial services, and contends that any market access should be granted by either side unilaterally in its own interests. The UK proposes establishing a unique legal and governance arrangement and allowing mutual free market access under that arrangement. Reaching an obvious compromise from these extreme starting positions likely will be difficult.

The next round of negotiations opens on 1 June 2020.