- As expected, little relating directly to financial services, but firms to play crucial role supporting heavily impacted businesses
- Movement of essential financial services workers challenged physically by COVID-19 restrictions, as final relocations continue
- Four main areas of regulatory focus: cross-border access; protective or open policies; capital and frictional costs; and co-operation on the supervision of large groups and global policy forums
Omar Ali, UK Financial Services Leader at EY, comments: “After four testing years of negotiations, financial services firms will be relieved that a deal has finally been reached ahead of the transition period deadline. As expected, there is little relating directly to financial services firms in the deal, but tariff-free cross border trade in the real economy from 1 January 2021 is really important for their SME and corporate clients. In a recent EY poll of senior management within UK financial services firms*, almost all respondents (96%) claimed that not having a deal would cause the sector to shrink, so today’s announcement is certainly positive in that regard.
“The UK financial services industry is robust and has shown great agility since the Referendum, coping well through uncertain market conditions. Firms have prepared well, and by and large are expected to serve customers without disruption from 1 January 2021.
“The focus for financial services firms now will be on what can be achieved through trade deals and regulatory cooperation with key financial services hubs across the world. For many financial services firms - which operate digitally and employ significant numbers of people - the agreements on data and migration will be as important as the detail of the agreements on financial services itself.
“The UK Government recently announced its intentions on equivalency, but this has not yet been reciprocated by the EU. Equivalency isn’t just about access; it’s about the cost of doing business. A lack of equivalence decisions would increase the cost of doing business for financial services firms and the clients they serve. This would impact market efficiencies and the global competitiveness of financial services businesses operating both in the EU and the UK.
“Looking further ahead, the financial services industry will be keen to receive more clarity in the coming months on how the UK Government proposes to achieve the green and digital ambitions set out recently by the Chancellor as he proposed his vision for the future of UK financial services on the global stage.
“For financial services firms – one of the UK’s biggest exports - the end of the Brexit transition period is just one milestone. Key policy work is still to be done both in the UK and the EU, and so in many respects the waiting game continues. UK policymakers must now look ahead, towards how we continue to create the strongest future for UK financial services.”
Physical COVID-19 barriers add to strategic challenges around the UK-EU movement of essential financial services workers
Seema Farazi, UK Financial Services Immigration Leader at EY, comments: “The movement of people was always likely to be ‘deal agnostic’. At this stage, there appears to be very little to support UK businesses moving people across EU borders from 1 January 2021, but the devil will of course be in the detail. This is a unique moment for the Government to modernise the trade and migration interplay and press ahead with earlier made plans to enable broader worker mobility between the EU and the UK.
“Within financial services we know that over 7,500 people are planning to relocate to the EU as a result of Brexit. Before the latest lockdown restrictions, we saw a flurry of final moves to ensure rights of residence were properly established by the cut-off, particularly as many in the sector have been working from alternative locations during the pandemic lockdowns.
“The transition deadline was agreed before the onset of the pandemic could have been foreseen, and with the added difficulty of COVID-19 restricting movement to and within many European countries, there are deeply practical physical barriers in addition to the significant strategic challenges to overcome. This remains true despite the deal today.
“In our recent poll, over 70 senior management representatives from UK financial services firms said that COVID-19 related travel restrictions and health risks as well as restrictions around permission to work were the key challenges to 2021 cross-border remote working. Both are significant concerns, especially if the UK continues to sit outside the safe-list for travel into January 2021, although these rules are typically decided country-by-country.
“It is essential that key functions such as risk and finance have been established in an EU hub if they are to operate without disruption. While many of these moves have already happened there will be some firms that are lagging, and guidance from regulators in the UK and the EU will be helpful in the short-term.
“Cross-border remote workers who do not have the right regulatory and immigration permissions will in many cases need to ‘down pens’ regardless of the deal. With freedom of movement across the EU soon to stop for UK nationals, cross border working and business travel will need to take a different shape and break a 40-year habit. This won’t come without compliance risk. Most firms have put enough plans in place to ensure they will be operational on the 1st January 2021, but as the dust settles, we expect the real impact – such as costs and strained resources - to hit in the first quarter of next year.
“For UK nationals looking to work in the EU one of the key challenges will be navigating so many new regulations, some of which will be positive, such as the UK-Swiss Mobility Agreement, others less so.
“Today’s deal confirms many business’ concerns around mobility in a post-Brexit world and signals the end to the previous mutual recognition of professional qualifications and experience. All of this adds to the huge disruption we have already seen this year to the workforce. But, the broader, more long-term talent concern is the potential long-term loss of top UK expertise to other European markets and vice-versa.”
Unresolved regulatory decisions form key focus for financial services firms
John Liver, UK Financial Services Regulation Leader at EY, comments: “Financial services firms will now be turning their attention to the strategic UK-EU regulatory decisions that still remain unresolved. The UK has set out its intentions for equivalence, but without agreement on both sides, there are fundamental questions yet to be answered. There are four main areas of focus now for financial services firms:
- The extent to which cross-border access will be permitted through equivalence determinations or through country-by-country policy, in particular for wholesale securities businesses. There is not likely to be a quick resolution for derivatives and securities, and there is a real risk of fragmented markets, which would be inefficient and costly for users. Our recent poll found that the majority of respondents (74%) currently believe that the EU will grant further equivalence determinations, but that they will be limited in scope. Just 17% believe any announcement on equivalence would include a temporary MiFIR Article 47 determination. Within clearing, banks will be particularly keen to understand the outlook that will follow the temporary conditional equivalence decisions deadline.
- The extent to which either side’s regulatory policy might become protective rather than open.
- Equivalence decisions that go beyond access, to capital and other frictional costs, which will be critical inputs to global groups looking at the viability of future business and operating models.
- And last but by no means least, is the regulatory cooperation around the supervision of large groups and global policy forums on key topics like the digital and green agendas.
“For EU firms operating in the UK, the Temporary Permissions Regime (TPR) will be welcomed, but significant preparation is still required. This will include regulatory engagement to prepare for a ‘landing slot’, which involves significant preparation for quarter-end and annual reporting requirements once authorised, and the establishment of new operations to support third country branch obligations.
“Outside of the lack of clarity on regulatory equivalence or cooperation, the most important topic for financial services firms is going to be data, not least to avoid payments disruption and to ensure regulatory compliance across markets, where fines levied can be huge. As a priority, firms need confirmation about whether they can continue to share data internally within their own organisations and with third parties without breaching the rules in any of the countries they operate in.”