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On 27 June 2023, the UK and EU signed the Memorandum of Understanding (MoU) on regulatory cooperation in financial services. In its announcement the UK government said:
“The memorandum of understanding will establish an ongoing Forum for HM Treasury and the European Commission to discuss regulatory matters of mutual interest. The Government looks forward to holding the first meeting of the Forum as soon as possible.”
This paper sets out the origins of the MoU, its content and what may be expected from it, plus some longer-term reflections.
Well before the UK’s EU Referendum in 2016 it had been recognised that UK withdrawal from the EU would open the prospect of major adaptation, if not wholesale dislocation, of the closely integrated arrangements linking the UK financial services market with the financial services markets of other EU member states. These arrangements were akin to a common policy of the kind exemplified in other EU areas such as agriculture, trade, or transport. EU financial services law and policy bear and retain for the time being a deep imprint of British influence, exerted by British officials within the institutions and by the UK government and the “industry” generally. If the Common Agricultural Policy is identifiably French, EU financial services policy was, until UK withdrawal, marked by UK DNA. The resultant arrangements represented an exceptional degree of market integration. There was a detailed web of EU legislation allowing not only for the removal of barriers to trade between financial services markets but also a shared approach to regulation, in which a financial services entity regulated in one member state could benefit from a “passport”. The passport allowed its financial services suppliers to trade their products in other member states without, generally, further regulatory requirements.
After the UK’s EU Referendum, when the terms of UK withdrawal began to be discussed, an immediate question for discussion among UK financial services providers was how far the existing framework for doing business could be preserved. Would there be a “soft Brexit” allowing for continuing UK participation in the EU Single Market? Could there be some system of mutual recognition between the UK and EU regulatory regimes, allowing for continued mutual market access on the basis of regulatory regimes that were recognised as meeting the same tests of the soundness of financial services providers and the same consumer protection requirements? All such thinking however depended on the terms chosen for UK withdrawal from the EU and for the future UK-EU trading relationship; and, in the event, neither side showed any appetite for such an approach. The UK made little attempt to cover services, including financial services, in the Trade and Cooperation Agreement (TCA) being negotiated; and the EU took an extremely restrictive attitude to the granting of “equivalent” status to various forms of financial services business.
The terms which finally emerged in the UK Withdrawal Agreement and the EU-UK TCA were akin to those that had formed the basis for the EU-Canada Comprehensive Economic and Trade Agreement (CETA). They focused very largely on trade in goods free of import duties, with little on services, including financial services, beyond both parties’ commitments from 1997 onwards under the Fifth Protocol (Financial Services) to the WTO General Agreement on Trade in Services (GATS). There was no agreement on mutual recognition of financial services regulatory regimes, still less any agreement to replicate the previous passporting system. UK financial services suppliers were effectively placed on the same basis as suppliers from any other third country.
It was however recognised at the time of the TCA’s conclusion in 2020 that the UK and EU financial services markets could not simply go their separate ways. The markets had previously been deeply integrated, and major suppliers in each market were set to continue to operate in both: regulatory issues, including cooperation and intelligence-sharing between regulators in urgent cases, were bound to have to be addressed. It was therefore agreed that, alongside the TCA, there would be a Joint EU-UK Declaration on Financial Services Regulatory Cooperation, in which both parties committed to agreeing an MoU establishing the framework for their cooperation. The Declaration’s stated aims included “establishing a durable and stable relationship between autonomous jurisdictions” on the basis of “a shared commitment to preserve financial stability, market integrity, and the protection of investors and consumers”.
Following the Joint Declaration, there were technical negotiations on the precise content of the MoU. These concluded in March 2021. The remaining steps were then for the European Commission to submit the draft MoU to the Council for endorsement, and for the MoU to be signed by both sides. At that point however there was a hiatus, owing to worsened relations between the EU and the UK, largely caused by suggestions that the UK might not honour the Northern Ireland Protocol associated with the Withdrawal Agreement, or might even attempt legislation to disapply it. These problems were largely resolved in the Windsor Framework agreement, which opened the way for recasting the UK-EU relationship across a range of policy areas, including financial services. Following endorsement by the EU Council, the MoU was signed on 27 June 2023. The first Forum meeting is likely to be in October or November 2023.
The MoU sets up the Joint UK-EU Financial Regulatory Forum. The key participants in the Forum are the UK Treasury and the European Commission (the Directorate‑General for Financial Stability, Financial Services and the Capital Markets Union (DG FISMA)). Others who can be included are regulators, supervisors, other UK government departments, representatives from EU Member States and (“subject to prior approval by the Participants”) other relevant experts, as appropriate. The Forum will meet semi-annually, and is designated to “serve as a platform to facilitate structured regulatory cooperation in the area of financial services”.
The MoU simply sets up a framework for enhanced dialogue to take place in the Forum, and sets out, in very broad terms, some shared objectives. In no way does it represent an accord or even a pathway towards rebuilding the integrated market structures that existed before UK withdrawal from the EU. It can however be viewed as signifying an intention to find means of cooperating on issues of shared concern, which may gradually contribute to improving UK-EU relations in the field of financial services. By setting up a Forum the MoU also provides an added degree of formality to the existing relations between UK and EU regulators. This, as predicted in March 2023 by the House of Lords European Committee, will have value as a mechanism for strategic dialogue, even though a series of other MoUs for technical cooperation between regulators is already in place.
The MoU sets out a shared objective of preserving financial stability, market integrity and the protection of investors and consumers, which will be achieved by:
The bilateral exchanges and dialogue will predominantly take place twice-yearly in the Forum, with the first meeting due to take place in autumn 2023. In particular, the Forum is “intended to take stock of progress and to undertake forward planning of regulatory cooperation with general operational objectives to:
The MoU is explicit in providing that “the regulatory cooperation should not restrict the ability of either jurisdiction to implement regulatory, supervisory or other legal measures that it considers appropriate.”
Much of the rest of the MoU is concerned with the practical running of the Forum (such as establishment of sub-groups or the ability to issue reports of proceedings). There is a provision for either side to signal its wish to revise or end the MoU. While designating Commission DG FISMA and HM Treasury as the principal Forum participants, the MoU is silent on the precise level of participation. This could prove unfortunate if it were used as a means of deflecting any pressure at the political level for progress to be maintained. It is noteworthy that the House of Lords European Affairs Committee has secured confirmation from the Economic Secretary to the Treasury that the MoU does not exclude the possibility of Ministers and EU Commissioners participating in the Forum and that the Economic Secretary and Commissioner McGuinness will continue to work closely with officials to set the political direction for Forum discussions and the wider relationship, with an expectation on the UK side that they will meet between Forum meetings to ensure that UK government and Commission positions are clear and that policy direction is shaped at the political level.
Paragraph 11 sets out an illustrative list of Forum activities which “in a manner consistent with applicable policy, law and good administrative practices” may include:
At this stage, before the first Forum meeting has even been convened, any assessment is bound to be preliminary. It seems clear that the Forum will help re-establish and enhance personal contacts and networks between the participants and the wider community of stakeholders, who already meet in international fora, industry associations, and in other ways. Their existing familiarity with each other’s concerns, personalities and motivations will help the Forum immeasurably (literally, because the benefits are likely to be considerable but very hard to quantify). That said, how the Forum will work, and the success it will have, must depend on the degree of shared common purpose between the participants, and the willingness of both sides to make progress by volunteering genuine exchanges of ideas, rather than confining the dialogue to a formalistic six-monthly exercise in comparing notes on prescribed topics.
In that regard, the MoU is very open and non-prescriptive. It simply creates a framework for dialogue, noting that transparency and dialogue will be important in such areas as the maintenance of financial stability and observance of equivalence, suggesting some objectives, and offering a non-exclusive list of potential topics for dialogue. It does not suggest any overarching objective such as maintaining a degree of alignment between the UK and EU regulatory regimes: indeed it underlines the importance of preserving the regulatory autonomy of both parties. Nor does it speak of any shared destination towards which both parties might be travelling, such as the creation of a shared UK-EU market in financial services for the benefit of business end-users of those services in both jurisdictions, in the interests of joint wealth-creation, growth and jobs. It offers an available vessel, without prescribing what the content of the vessel should be.
There are precedents for the MoU in the record of both the UK and the EU towards other trade partners. Both have agreed to a range of dialogues that include financial services. On the EU side, dialogues have been established with third counties covering financial regulatory issues, including: