Five things we have learned about the Brexit MoU

The Brexit Trade and Cooperation Agreement did not specifically address financial services. However, the EU and the UK did commit to agreeing a separate Memorandum of Understanding (MoU) on financial services as a basis for the ongoing relationship between the two parties.

The MoU has now been agreed, subject to votes to approve the text. Here are five things that you should know based on the draft MoU and our view on what it means for asset management.

1. The MoU does not detail any decisions about regulatory equivalence. The document defines the relationship between the EU and the UK and the means by which the two parties will engage with one another.
2. The logistics will be based on the existing Joint EU-US Financial Services Forum. The aim is to provide a mechanism for bilateral discussions between the EU and the UK with an aim to be transparent about each party’s approach to financial regulation.
3. The arrangement will not compel the parties to reach agreements on equivalence or any other matters. Although the regularity of meetings (the schedule of which is not detailed in the draft MoU) will provide a focal point for (mainly UK) requests for equivalence and (mainly EU) complaints about regulatory divergence.
4. However, the MoU does commit both parties to discuss their “autonomous decisions” to adopt, suspend or withdraw equivalence. This could mean more dialogue and process around equivalence, albeit for instance without formal notice periods to withdraw equivalence.
5. The draft makes several references to cooperation in international forums and the promotion of timely implementation of international regulatory standards. This is a priority for the UK, which wishes to both drive international standards and to promote their adoption as the basis for national regulations. However, the EU might likewise point to international standards to seek to constrain the UK from diverging significantly from the EU.

What this might mean for regulation in future

The lack of formal mechanisms to reach agreement means that the degree of cooperation between the EU and the UK will be more dependent on how each party treats the relationship and the meetings of the Joint EU-UK Financial Regulation Forum. The precedent of the EU-US equivalent mechanism suggests that, while the meetings might help resolve regulatory conflicts, it is perhaps optimistic to expect comprehensive coordination.

Many asset managers adapted their business models prior to the Trade and Cooperation Agreement to account for the possibility of a no deal Brexit; for example, establishing a presence in both the EU and the UK for the purposes of distributing funds. The legal agreement and the subsequent MoU alone are not likely to provoke changes to those business arrangements.

While equivalence decisions would still be welcome in some areas, there is perhaps less urgency and a degree of diminishing returns for asset managers as existing solutions to keep doing cross-border business are embedded. The unstable nature of equivalence approvals, which could be withdrawn without formal notice, also means that asset managers might prefer to rely on the more permanent solutions that they have already adopted.

The more limited outlook for equivalence could eventually encourage the UK to seek greater regulatory divergence from the EU. In the short term, there is perhaps more scope for the UK doing things differently outside of the EU’s regulatory frameworks, such as in relation to the listing rules and fintech. Although the UK does have some immediate options for divergence that we detail in our "Big Bang 2.0" report. The telling point will be how the UK reacts when the EU adopts new legislation, which could be as soon as the summer with the EU’s AIFMD and MiFID II Reviews and further ESG reforms on the way.