House of Lords: New UK-EU financial services inquiry launched

04 February 2022

What has been the impact of Brexit so far on the UK financial services sector? What is the future of financial services trade with the EU in the absence of equivalence? And what impact will regulatory divergence have on UK-EU financial services trade?

 These are the key questions the European Affairs Committee will explore as it launches a new inquiry.

• Inquiry: The UK-EU relationship in financial services
• European Affairs Committee

Background

In 2019, the UK’s trade surplus in financial services was calculated at $77 billion, making it the world’s largest net exporter of financial services. 34.3% of the UK’s financial service exports were to the EU. The sector generated more than 10% of total tax receipts – in the region of £75.6 billion.

In contrast with many other sectors, the Trade and Cooperation Agreement (TCA) contains only limited provisions on the trade in financial services between the UK and the EU. The former EU Services Sub-Committee, a predecessor to this Committee, called in a March 2021 report "Beyond Brexit: trade in services" for the Government “not to disregard the value of a close UK-EU relationship in financial services” and stressed that a “deep level of regulatory cooperation between the UK and EU” would be in the interests of both sides in the management of future divergence.

Alongside the TCA, the UK and the EU published a Joint Declaration on Financial Services Regulatory Cooperation between the European Union and the United Kingdom, in which the Parties committed to agreeing a Memorandum of Understanding to establish structured regulatory cooperation on financial services. However, although technical negotiations on this Memorandum of Understanding concluded in March 2021, it has not yet been formally signed or entered into force.

Since the signing of the TCA, the EU has so far granted the UK only two equivalence decisions for financial services, both of which have been time limited and one of which has since expired. Conversely, the UK has granted equivalence to EEA member states in 28 of the 32 areas identified for the equivalence process.

Now that the UK has left the Single Market, the UK Government is examining potential changes to its regulatory regime for financial services and has commissioned a number of reviews into potential changes. The EU’s regulatory framework in this area is also expected to change over time.

Key issues

The key issues the Committee is seeking to address in its inquiry include:

• The impact so far on the UK financial services sector of the UK’s departure from the EU Single Market;
• The impact of the absence of a functioning framework for UK-EU regulatory cooperation;
• The future of cross-border UK-EU financial services trade in the absence of equivalence;
• The impact of regulatory divergence and agreements with third countries on UK-EU financial services trade.

Timeline

The Committee expects to report by May 2022.

House of Lords

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