In an ideal world, we were supposed to be well beyond Brexit by now. On February 23rd the UK consented to the EU’s request for further time to ratify the EU-UK Trade and Cooperation Agreement (TCA). The TCA has been applied provisionally in the EU since January 1 and was supposed to be ratified by February 28th. This extension to April 30, 2021 should allow the EU decision-makers time to ratify the TCA as things have been sidetracked in combatting COVID-19 and borrowing perhaps from the Banking Union to build a Health Union. The EU Council have committed to strengthen future health resilience and financing – especially now that Next Generation EU (NGEU) and common debt based refinancing of the recovery efforts are now approved. A report on lessons learned from the present pandemic has been commissioned by June 2021.

While Brexit deadlines and delays are certainly not new, this change, aside from the constitutional issues that a further extended provisional application of an unratified treaty presents, is an issue for financial services. The TCA, at the request of the UK, did not include financial services but it did, under the guise of the technical working group of the TCA Partnership Council commit to some form of agreement. The working group in question would be tasked with putting a plan forward of what such mutual rights might look like. Such work was supposed to be completed by March 2021. Absent some framework deal, various supervisory memorandums of understanding exist but that this does not equal access let along equivalence. Even where these are being strengthened even some regulators have expressed that they may be more of a paper tiger as their use in practice will be limited.

This most recent TCA delay brings that work and any equivalence decision to a pause – with euro-denominated business picking up pace on relocations raising the question of whether one needs equivalence anyway if business is moving as well as changing in how it is being done. The EU has stated that it requires further information concerning the UK’s regulatory intentions before it can grant an equivalence decision. Such a decision may be granted where the UK’s regulatory regime is deemed sufficiently robust to ‘equal’ the EU’s. However, even where the UK meets all necessary criteria, the decision is ultimately at the EU’s discretion. The UK has stated that is has supplied the EU will all necessary paperwork, adding that it is “one of the world’s most pre-eminent financial centers, with a strong regulatory system.” However, concerned about divergence from EU rules, the European Commission (as the key decision maker) intends to discuss equivalence with the UK “progressively” and on a case-by-case basis.

February 2021 has therefore shown that the sensitivities on financial services still continue post-Brexit. For all types of financial services firms, regardless of their post-Brexit operational readiness, these developments matter as they impact structuring and resourcing options, as London’s European business flows to a more multi-financial center based model.

Meanwhile beyond Brexit, further and final workplans for 2021 have been released – while late they are still welcome and point to policymakers looking past the pandemic while still in the midst of it and preparing a range of further regulatory reforms. The ECB is also set to expand its operating budget by EUR 80 million for new supervisors, the EBA, ESMA and EIOPA have all equally begun to hire additional and more specialized supervisory staff and work at national level is much the same notably in respect of BaFin.

We also note that the ECB is adding diversity and inclusion to its list of priorities that fall under the governance component of its fit and proper assessment with an announcement set for March/April. This would mark the first major update to the ECB’s Fit & Proper supervisory guidance/expectations since 2018 (see our analysis here and here).

We dive into some of these institutional developments in further detail in the Eurozone Hub and Navigating 2021, which is now available for general release following advance copies for those clients that have requested this.

As predicted in our January edition and as explored in our Client Alert, ESMA has taken a step-up on GameStop and gamifying of trading by retail clients. We expect a further range of regulatory announcements to follow and please see our forthcoming coverage on this.