30 March 2021

UK / EU ‘edge toward’ (limited) financial services agreement

This is our latest roundup on UK financial services.

1) UK / EU ‘edge toward’ (limited) financial services agreement

Since our last update, the European Commission (EC) has now moved to commence legal proceedings against the UK, citing breaches of substantive EU law provisions (i.e. the Protocol on Ireland and Northern Ireland) alongside the “good faith” obligation of the 2020 Withdrawal Agreement.

This follows the EU Parliament’s decision to postpone their ratification of the UK Trade deal (TCA) which must be formally approved before end-April 2021.

There has also been additional high-profile disputes (e.g. covid-19 vaccine supplies, Gibraltar tax breaks and diplomatic status accorded to the EU’s ambassador), widely reported in media channels.

Despite all of this, it seems that both sides are apparently edging towards some agreement on a memorandum of understanding (MoU) for future co-operation within the financial sector (i.e. as per the end-March “soft” deadline included in their recent TCA).

As before, it remains most unlikely the EU will grant “equivalence” status to UK financial firms i.e. to re-enable their directly access to EEA fund markets (at this stage).  More likely is a new “talking shop” for co-operation on financial services, with the EC retaining their role as ultimate decision-maker.

Indeed, the EU’s financial services commissioner told the BBC last weekend that “[the EC] will not be recreating the conditions of the single market for the UK, because the UK chose to leave.”

Addressing an ESMA conference yesterday, Ms McGuiness articulated further, saying that a financial services MoU will not involve the announcement of “a big package”, but instead a joint forum to discuss financial services “pressure points” on a “case-by-case basis”.

2) Notable recent UK financial services updates

a) FR-AMF: non-EU financial services reliance = ‘totally wrong’

Press coverage of yesterday’s ESMA event contains views expressed by the chairman of the French financial regulator (AMF).  M. Ophèle declares the EU-bloc should now aim for financial services self-sufficiency and focus accordingly on “competitiveness, if we intend to assess EU financial independence and sovereignty”.  This seems to be the AMF’s latest referral to EU delegation arrangements (currently under review) that enable EEA fund firms to readily appoint UK-based  investment managers.

Meanwhile, M. Bechet from the Luxembourg Fund Association (ALFI – including Kneip as a member), suggests the EC should avoid a “line-by-line” examination of UK regulation.  Instead, he proposes that Brussels can tolerate differing EU/UK regulatory systems in due course, on the condition they are able to produce broadly similar (“equivalent”) investor protection rules.

b) FCA: set to acquire powers to ‘tear up’ MiFID II rules

It has been reported that the UK Treasury is planning to hand over ‘enhanced powers’ to the Financial Conduct Authority (FCA) in a move to “make the UK the most open and dynamic financial centre in the world [and] reduce burdens for firms whilst maintaining high standards of regulation”.

Currently, UK financial services amendments are administered via the parliamentary legislation process; ongoing, the FCA are set to receive a mandate to shape future regulations, directly.

With legislative proposals now anticipated before the end of this year, a summertime HMT consultation will allegedly include proposals to streamline the MiFID II capital markets framework (e.g. onerous “prescriptive” rules and “excessive red-tape”).

c) Invesco: ‘complications’ ahead for UK overseas fund regime

As previously mentioned, the Financial Services Bill presented by the UK Government last October contains a new prudential regime for UK investment firms (IFPR), a de-aligned UK-PRIIPS regime and an Overseas Fund Regime (OFR) to accommodate EEA-UCITS funds (i.e. largely domiciled in Luxembourg and Dublin), currently sold to retail investors within the Temporary Permissions regime.

Invesco’s senior legal counsel has now identified numerous OFR “risks for complication”, including the need for EEA funds to formally apply for FCA recognition, together with UK financial intermediaries facing divergent UK/EU transparency rules (e.g. the assessment of value [AoV] requirement, mandatory in the UK).

d) Increased demand (and charges) for EEA fund marketers

“Prices are going up. More business is coming to Europe, and there is more demand for European distribution.”

Ignites highlight the post-Brexit market trend of ‘surging’ demand for third-party EU distributors in parallel with sharply increased costs now facing those UK asset managers without the direct means to market their funds to EEA clients.

Following recent price hikes (ranging between 25-400%, depending on the source), UK firms can now expect to pay fixed “retainer” charges averaging €60-100,000 p.a. (i.e. with additional trailer fees payable on top) to procure assistance from an EU distributor.

Alternatively, if UK firms wish to set up an EU-office themselves, they should estimate costs of €250,000 (“minimum”).

e) FCA Operational Resilience rules pending March 2022

Finally, there is legal anticipation of the UK supervisory authorities nearing publication of their finalised policy statements outlining local operational resilience rules (applicable for ‘Important business services’ supplied to UK firms) i.e. similar to the EU-DORA proposals currently under scrutiny.

These follow a lengthy UK consultation process (ending last October) and are expected to commence from March 2022 (i.e. deferred given the continuing pandemic).

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