The EU’s focus on Banking and Economic and Monetary Union is encouraging in light of the impending second tranche of Brexit negotiations between the UK and the EU. The services sector as a whole accounts for approximately 79% of UK Gross Domestic Product and EU regulators’ continued focus is particularly important when considering the new basis required to enable businesses to provide financial services cross border.

The International Regulatory Strategy Group (IRSG) published a third report on the basis of a future EU-UK trading relationship with a starting point that it is in the mutual interest of the EU 27, the UK, businesses and the financial services sector as a whole, for cross border flows to continue. The report builds on the idea that the current EU third country/equivalence regime is not sufficient to support cross-border flows in services and analyses relevant components of a financial services chapter in any potential free trade agreement (FTA). It presents many interesting ideas and promulgates potential solutions, however, many of these are not currently viable due to the EU’s stance. Maintaining the current state of service flow post-Brexit is seen as cherry-picking by the EU and circumstances would have to change (and other concessions be made) in the EU position before the solutions in the report could carry weight in negotiations.

Report Coverage

It is noted that much of the machinery is already in place. The EU and UK have aligned legal and regulatory regimes and supervisory cooperation between regulators, ensuring prospective enforcement, however, FTAs, despite providing a precedent for trade in financial services, do not provide for license-free access for firms across borders. The UK government is aiming for the freest possible trade in financial services and the EU has confirmed its commitment to a bold and ambitious FTA, but a question mark arises over the mechanics for each party getting its way. In light of this, the report summarises what are seen by a broad cross-section of players from the UK financial services industry as key issues in relation to mutual access as follows:

(a)    Multi-sector context – common issues compared to sector specific approaches;

(b)    Existing FTAs – “national treatment” and “market access” are common provisions for an FTA but licence-less cross border services supply is unprecedented in an FTA;

(c)     Alternative cross-border access mechanisms – existing passporting rights will cease and both parties must find a way to secure access to each other’s markets;

(d)    Range of activities – which financial services will be covered and in which ways will access be given;

(e)    Reservations/Exceptions – carve outs for FTAs;

(f)      Proposed “prudential carve out” – allows the parties to restrict the scope of the FTA to preserve market stability and providing market stability;

(g)    Conduct of business – which rules would apply to be followed, those rules in the home state or host state;

(h)    Current alignment – UK and EU must be satisfied that firms from the other state are appropriately regulated;

(i)      Assessing divergence – there must be a mechanism for assessing future divergence when this will be a barrier to mutual access;

(j)      Ongoing alignment and regulatory cooperation – processes for dealing with regulatory changes which may affect the alignment between the parties to an FTA. This reflects the fact that standards (ie information sharing and regulatory transparency) will cease to apply to the UK upon Brexit;

(k)     Supervision – mutual access requires supervision of individual firms including dispute resolution;

(l)      Resolving Disputes;

(m)  Consequences of divergence – not all material, negative or adverse but consequences must be specified; and

(n)    Termination – how either party could withdraw from the FTA.

In addition to listing issues, the IRSG incorporates a summary proposed approach for adoption in respect of each of the above-mentioned key issues into the report.


Regardless of negotiating strategy and the wants and requirements of the parties, both the UK and the EU remain subject to existing obligations as members of the WTO and other existing trade agreements. The effect of these agreements on any mandate for an FTA will play a role in a starting point for negotiations on financial services and mutual recognition. Important considerations include which existing agreements can form part of the structure of negotiations and models for this (including, inter alia¸ GATS, CETA and other recently negotiated agreements) and reviews of such agreements and their differing negotiations and format is included in the report for reference.

This includes a reminder of the limits of the EU’s competence to enter into international agreements in accordance with the EU treaties and the fact that technically the UK cannot conclude (or begin negotiations for) international agreements with third countries. Post-Brexit, individual EU member states are also prohibited from entering into trade-related agreements individually with the UK, the EU maintaining sole competence.

As a practitioner-led group from the financial services sector with the overall goal of promoting sustained economic growth (in this instance supported by The City UK and the City of London), the IRSG provides invaluable insight into those who will be closely affected by the pending negotiations on equivalence for financial services.