INTRODUCTION

One of the major issues in the forthcoming process of the UK leaving the EU is the area of the negotiations that relate to financial services. There is great concern among the financial services sector about what market opportunities will exist in the new relationship the UK has with the EU. There have been calls to remain a member of the single market, by way of the EEA or other arrangement that would entail continuity of EU regulation of the single market and, most likely, financial contributions. We have articulated the cost of remaining within the EEA in our separate briefing paper “Costs of the Single Market”.

This approach would sacrifice the opportunities the UK would have outside of the acquis communitaire and the common commercial policy to enter into free trade agreements with other countries that include services, and, in particular, financial services access and liberalisation. The UK economy is close to 80% services by GDP. The proportion of that comprised by financial and related services is around 15%, so we submit that committing to the single market to preserve the perceived benefits for financial services would come at too great a cost to the opportunities for the services sector as a whole, and even at the expense of the financial sector itself.

We have built on the introductory briefing to provide a more detailed sector by sector analysis of four key areas of financial services, how they are currently regulated, and what options are available for future access to the EEA single market by UK operators after the UK has left the EU. These four sectors are the key structural financial services, and we have focused on them because they the most significant to UK business, in the financial sector and beyond. Others, such as payment services, mortgage credit directive, credit rating agencies, issue of electronic money, will need further research to identify any specific issues. SEPA and TARGET2-Securities (“T2S”) infrastructure and others are not covered here and will need further research, but both are in principle open to countries and central securities depositories that meet the applicable eligibility requirements (Switzerland is a member of T2S and SEPA. Jersey, Guernsey and the Isle of Man are members of SEPA).

Horizontal barriers in respect of investment, purchase of real estate, and movement of persons will affect the financial services sector and will also need to be covered in transitional arrangements. Restrictions on associated services such as law, tax, insolvency and accountancy will need to be addressed. The Association of British Insurers has identified 80 EU directives and regulations that impact the insurance sector, much of which will affect financial and other service providers more generally as it includes general legislation on, for example data protection, e-commerce and tax. While much of this will be retained or transposed into UK law, there will be practical considerations to consider around competent authorities and similar. Further consideration will be given to these areas in future briefings.

Broadly speaking, EU financial services legislation is applicable throughout the EEA. This paper talks generally about regulation and access across the EEA, although in some cases, for example some parts of CRD IV and AIFMD, the regulations have not been fully implemented through the EEA agreement.

By Shanker Singham and Victoria Hewson

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About the Legatum Institute Special Trade Commission

The Legatum Institute Special Trade Commission (STC) was created in the wake of the British vote to leave the European Union. At this critical historical juncture, the STC aims to present a roadmap for the many trade negotiations which the UK will need to undertake now. It seeks to re-focus the public discussion on Brexit to a positive conversation on opportunities, rather than challenges, while presenting empirical evidence of the dangers of not following an expansive trade negotiating path. The STC draws upon the talent of experienced former trade negotiators from the US, Canada, Mexico, Australia, New Zealand, and Singapore, among other nations. In the coming few months, the STC will host a number of public briefings that offer advice to key stakeholders on EU negotiations.