UK financial services industry: operating in the EU after Brexit

03 February 2020

The United Kingdom is no longer a member of the European Union. After three years of settling the departure terms, the negotiation of future terms finally begins.

The UK government has until 31 December 2020 (the implementation period) to agree the UK’s future relationship with the EU. Although the UK and EU have agreed the Political Declaration alongside the Withdrawal Agreement to form a basis of the negotiations, it is light on detail and not legally binding. So whilst in theory all options remain on the table, in practice the political implications present a different reality. We know that a deal can be made within 2020 but whether such a deal will be sufficiently comprehensive remains to be seen.

This note sets out the implications of the negotiation process, the position for firms during the implementation period and how they should prepare for a “no-deal” future relationship.

The negotiation process – can a deal be reached in the time available?

Although the UK government has stated that it is ready to start negotiations as soon as possible after 31 January 2020 (Brexit day), it is unlikely that negotiations will begin until the end of February or early March. This is because the European Commission (EU) must propose a mandate for the negotiations to EU Member States in order for negotiating directives to be adopted and the opening of negotiations to be authorised. As this process will not begin until after Brexit day, the reality is that the UK will have a maximum of 10 months to conclude a deal. It is possible for the UK to agree an extension with the EU for 12 or 24 months, provided this is agreed before 1 July 2020. However, the Prime Minister, Boris Johnson, is adamant that there will be no such extension.

This means that both the EU and UK will need to take a pragmatic approach for the negotiations to be completed on time. Michel Barnier, the EU’s Chief Negotiator, has made it clear that to reach agreement on every point of the Political Declaration will take more than 11 months and that the EU “will prioritise on what we can do in 2020” and make as much progress as possible by June when EU27 and UK leaders will meet to take stock of the negotiations1. In slides released on 21 January 2020, prepared by the EU Commission for preparatory discussions on the future relationship, the EU Commission made clear its intention is to negotiate a new partnership in the form of a single comprehensive partnership agreement, with the possibility of supplementing agreements. The same slides also provided the substantive legal basis for signature and conclusion can only be determined at the end of the negotiations.

It therefore seems that to the extent a deal is achieved in 2020, it is unlikely to include sufficient detail regarding UK-EU market access arrangements for UK financial service providers operating in the EU. In particular, it seems more probable that the UK government would view completion of a skinny deal on trading of goods as a successful outcome for Brexit. This would enable the government to determine Brexit as complete and leave the more complicated negotiations on the provision of all kinds of services to after the implementation period.

The implementation period

The implementation period is the start of the UK’s life as a third country outside the EU in the sense that the UK will no longer have any formal influence as an EU Member State on framing EU policy or legislation but will continue to be subject to existing EU laws and new EU laws made during the implementation period. These commitments by the UK mean that the UK will maintain its market access rights until the end of the implementation period and firms can continue to use and apply for branch, services and/or marketing passports as currently applicable.

What are the options for firms after the implementation period


The best chance for the UK to maintain some of its financial service market access rights to the EU (and vice versa) would be by virtue of an overarching equivalence agreement. The EC has stated that it will endeavour to conclude equivalence assessments in around 40 areas by the end of June. A positive conclusion would enable the EU to recognise UK rules as equivalent to corresponding EU rules meaning that some firms (particularly MiFID firms or AIFMs) could continue to provide some services in the EU. The problem with any such equivalence agreement is that it would never equate to the current market access rights enjoyed in the single market. In particular, not all regulatory regimes as they currently stand provide for full access by way of third country equivalence and even if they did, equivalence would not provide sufficient business certainty as the EU would in all likelihood maintain discretion to withdraw an equivalence determination at any time. For example, neither the UCITS directives nor the EU’s banking services and payment services legislation contain provisions allowing for equivalence determinations.

In addition to this, to maintain equivalence, the UK would have to continue to comply with EU legislation in relevant areas in order for there to be a level playing field, but as a third country would have no power to influence policy making. On top of this, firms would also need to comply with any additional requirements prescribed by the EU. This has been illustrated in the ESMA Consultation Paper on Draft technical standards on the provision of investment services and activities in the Union by third country firms under MiFID II and MiFIR ostentatiously released on 31 January 2020, the day the UK left the EU. This latest ESMA Consultation Paper proposes onerous reporting requirements on third country firms (for example, UK firms) to provide to ESMA and/or host Member States prescriptive and detailed information for both initial registration as a third country firm and/or ongoing annual reporting.

On the basis that the UK has already implemented EU financial services legislation, an initial equivalence decision may appear straightforward. However, the politics of making positive determinations means that firms (especially AIFMs and MiFID firms which would benefit the most from equivalence) should not expect these decisions to be made on time or at all. In particular, the EC made clear that equivalence was not a right for all third countries in a statement in July 2019 and more recently has set out its approach that a balanced, ambitious and wide-ranging free trade agreement requires sufficient guarantees for a level playing field2. Given that the Chancellor, Sajid Javid, said that the UK will not be a rule taker, the UK and the EU begin negotiations a long way apart regarding expectations for equivalence. We therefore recommend that whilst firms should not forget about equivalence altogether expectations of any meaningful reliance on it need to be moderated for the foreseeable future.

In the immediate term, firms should consider whether they should prepare and implement their Brexit plans on the basis of a no-deal future relationship when the implementation period comes to an end and monitor developments regarding third countries which may (particularly for AIFMs and MiFID firms) benefit them further down the line when accessing EU markets.

What does no deal mean for accessing EU markets?

In the event that no deal is reached at the end of the implementation period (whether extended or not) the UK’s current EU single market access rights will cease. This means that from 1 January 2021, UK firms will no longer be able to use their passports and World Trade Organisation (WTO) rules will apply. The WTO does not provide for any access rights. UK firms will therefore only be able to access markets in accordance with local law requirements in each Member State3. Firms that wish to continue providing services in the EU following Brexit are likely to be well progressed with their Brexit structuring plans. Given the very real possibility of a no-deal Brexit at the end of the implementation period, UK firms should continue to implement contingency plans.

What does no deal mean for EEA firms continuing to access the UK market?

Depending on the activities carried out by EEA firms, there are potentially several avenues for accessing the UK market.

  • Reliance on a further transitional period (the temporary regime): If at the end of the implementation period there is no deal, it is expected that the UK government will provide a further transitional period for EEA firms and EEA investment funds currently operating in the UK. This would only be a temporary option but could be attractive to firms taking a “wait and see” approach to Brexit as it secures them further time to devise and implement their ultimate UK market access solution. We set out further information below on what firms might reasonably expect the temporary regime to provide for.
  • Private placement: EEA firms can continue to market funds in the UK using the UK’s current national private placement regime (the NPPR). The NPPR enables both EEA and non-EEA funds to be marketed to professional investors in the UK in accordance with domestic financial promotions rules. Clearly, this will only be an option in respect of marketing activities for professional clients. It will not, for example, provide regulatory cover for delegated investment management or funds marketed to retail clients.
  • Individually recognised overseas schemes: There is existing legislation in place for fund managers to apply for funds to become recognised under section 272 FSMA4. Recognition under the section 272 regime permits fund managers of non-UK funds to market to UK retail clients. Due to the availability of the UCITS regime to date, and the cautious way in which the section 272 provisions have been interpreted by the FCA, only a limited number of funds have achieved recognition under this scheme. The current section 272 regime is not fit for purpose so the Treasury and the FCA have committed to reviewing the regime and the Treasury has stated it will bring forward revised legislation as necessary in light of Brexit.

As timings are unclear at this stage, we recommend that managers of non-UK funds carefully follow the progress of regulatory developments regarding the section 272 regime as this is likely to be the only route to marketing non-UK funds to UK retail investors following the end of the temporary regime.

The temporary regime

We would expect this to mirror the framework which was established prior to the general election in anticipation of a no deal Brexit (the temporary regime). The temporary regime was designed to come into effect in the event of the withdrawal agreement not being passed leading to a no-deal exit without an implementation period. The temporary regime comprised:

  • a temporary permissions regime (TPR) for inbound passporting EEA firms and funds; and
  • a financial services contract regime (the FSCR) for firms not in the TPR to run off existing contracts and conduct an orderly exit from the UK market.


Under the TPR, inbound passporting EEA firms and investment funds would be able to continue to rely on their existing passports. In order to utilise the TPR, EEA firms and investment funds supervised by the Financial Conduct Authority (FCA) were required to notify the FCA by 30 January 2020 using specified forms. For incoming credit institutions or insurers supervised by the Prudential Regulatory Authority (PRA), the notification window had already closed. As these deadlines were imposed prior to the general election being called and on the basis of there being no implementation period, it seems likely that if the temporary regime is re-instated and the TPR adopted after the implementation period, the notification window will be re-opened later in 2020.

As originally planned, the TPR was stated to be available for a maximum of three years within which time firms and investment funds using the regime would be required to obtain authorisation or recognition in the UK (if required). It may be the case that if the government reinstates the TPR at the end of the implementation period those timings are reduced to take into account the implementation period.


The FSCR was provided as a default for firms that did not enter the TPR but have pre-existing contracts in the UK which would need a permission to service. It was intended to provide regulatory cover for EEA firms to run off existing UK contracts and conduct an orderly exit from the UK market. It would not have enabled EEA firms to write new UK business. Additionally, the FSCR would not have provided regulatory cover for EEA firms managing UK authorised funds, or the depositaries or trustees of such funds. These firms would need to have entered the TPR to continue to operate under the temporary regime.

The FSCR was intended to apply for a maximum of 15 years for insurance contracts and five years for all other contracts. Firms relying on the FSCR were also required to keep authorisation in their home state.

The FSCR provided for two approaches:

  • supervised run-off – for EEA firms with UK branches or top-up permissions in the UK, and firms who entered the TPR but did not secure a UK authorisation at the end; and
  • contractual run-off – for remaining incoming services firms.

Prior to the general election, additional run-off regimes were also established for payment and e-money firms as well as central counter parties and trade repositories.

Additional/alternative FCA/PRA rules were due to apply to firms depending upon whether they were deemed authorised or exempt under the applicable run-off regime.

Whilst the regulatory parameters for EEA firms operating in the UK following the implementation period remains uncertain, a cliff edge seems unlikely. However, this does not mean that firms should not press ahead with contingency plans. At this stage, there is no guarantee that the temporary regime will be implemented and even if it is, firms operating within the UK regulatory perimeter will still need to prepare for either authorisation in the UK, or an orderly run off of their business.

How will UK business operations of UK firms be impacted?

Although UK firms might reasonably expect business as usual in respect of their UK operations, some preparations will need to be made in the event of a no-deal Brexit at the end of the implementation period. The government will continue to onshore EU legislation to replicate EU financial services law into UK law to minimise disruption. However, this process is not straightforward in all cases and firms will need to prepare to comply with amended requirements. This is most apparent for MiFID firms subject to transparency requirements where operational functions previously performed by the European Securities and Markets Authority will be performed by the FCA. This means that less than three years after MiFID II implementation, firms will need to revisit their transaction reporting procedures to ensure that they can meet the new onshored requirements. In this area, the FCA will not provide a transitional period and has made clear that it expects firms to undertake reasonable steps to comply with the changes to their regulatory obligations which will take effect from the end of the implementation period.


Firms must use the implementation period to refine and execute their contingency plans. In particular, firms should:

  • monitor regulatory developments both in respect of onshoring existing legislation and providing for market access whether domestic or at EU level;
  • continue to identify all areas of their business which will be impacted by Brexit. This analysis must take into account all arrangements:
    • with an EU nexus (for example, delegation/outsourcing arrangements, distribution arrangements, servicing agreements, direct marketing); and
    • which are currently subject to EU law and therefore will be impacted by onshoring EU legislation;
  • ensure that there is a contingency plan for each area identified as at risk in the event of a no-deal Brexit at the end of the implementation period including horizon scanning for changes to relevant laws and regulations at the level of each Member State; and
  • understand the timings for Brexit, particularly the assessment of negotiations in June. Firms will need to make (further) judgements in terms of activating or, in the event of a further delay, pausing certain stages of implementation of their contingency plans.

This note follows on from our previous note “UK financial services industry: access to EU markets after the 2019 general election”, published on 16 December 2019. 
2 Internal EU27 preparatory discussions on the future relationship: "Personal data protection (adequacy decisions); Cooperation and equivalence in financial services" dated 10 January 2020 
3 On the basis that the Transitional Regime was expected to provide cover for firms for up to three years following a no deal exit, we would expect this regime to apply in the event a deal is not reached at the end of the implementation period.
4 The Financial Services and Markets Act 2000