No Deal makes no provision for financial services sector

Stephen Phillips is Partner and member of the Brexit Group at law firm CMS

As if COVID-19 hasn’t created enough economic turbulence for Scotland’s financial services sector, the UK could be heading for a No Deal Brexit on 31 December.

As we approach the end of the transition period, the tone of the current ‘negotiations’ between the UK and EU suggests our departure will be based on World Trade Organisation (WTO) rules or a ‘bare bones’ free trade agreement. Indeed, the feedback from my EU-based colleagues and clients is that they are uncertain whether the UK actually wants a deal, a view which appears to be supported by an apparent lack of urgency coming from the Westminster Government in recent months. Meanwhile the other 27 member states seem to have moved on and are now focusing much more attention on dealing with the impact of the global pandemic.

Both of the above outcomes are less far reaching than those discussed in the immediate aftermath of the Brexit vote, such as a Norway or Switzerland deal. WTO rules, for example, do not deal in any meaningful way with the FS sector. While a bare bones deal will focus on areas such as goods and transport, it too provides us with little if any detail on how our financial services sector would be impacted across EU markets post-Brexit. In fact, no previous free trade agreement has dealt with FS in any great detail, let alone in the depth of the EU single market.

This can only mean ongoing uncertainty for the sector as these matters will need to be resolved at some point in the future. While many Scottish and UK based FS firms have made preparations for this, the likely outcome is decreased access to the EU financial services market.

The lack of progress in completing equivalence assessments has led the EU to suggest it may postpone some key decisions until 2021, raising concerns it has no clear picture of what a post-transition UK regulatory environment will look like.

In the interim, the EU position seems to be hardening with a number of member states now looking to leverage advantages from Brexit and attract business from the UK. France has already taken the previously unimaginable step of establishing a commercial court that will hear cases in English.

While there are some positive signs, such as agreement on ongoing financial services regulatory co-operation and the continued recognition for a limited period of UK clearing houses, the EU has made it clear that it’s determined to lure more of this business into member state nations. There are also murmurings from the European Parliament that they wish to look at financial services delegation, a move that would have an impact on Scottish businesses with EU subsidiaries.

Ultimately, the future relationship will depend upon the degree of future regulatory divergence between the UK and EU.

Despite business lobbying, there’s little evidence to suggest the UK Government will change its policy or current approach to the negotiations. Scotland’s financial services sector must therefore work closely together to ensure that it continues to provide as an attractive base as possible. Retaliation against the EU must also be avoided with any divergence from its standards carefully balanced against potential loss of market access within the 27 remaining member states.

Westminster scrutiny of financial services regulation is far less detailed and expert-led compared to the EU equivalent meaning Scottish financial services businesses must be fully engaged with the development of new regulatory standards going forward. Otherwise there is a risk that regulatory changes may not meet the sector’s requirements.

Finally, it is vital that our sector continues to recruit the best people. With the support of Scottish Financial Enterprise, we must continue to promote the sector abroad and make it clear that, despite Brexit, Scotland will continue to welcome specialist skills from outside the UK.

Published 3 September 2020