Shearman & Sterling LLP

The U.K. Prime Minister delivered her third major speech on the future partnership between the U.K. and the European Union following Brexit. In it, the Prime Minister restated the key elements and provided greater detail about the U.K.’s aims for a free trade agreement with the E.U. post-Brexit.

The Prime Minister was candid about the fact there are some “hard facts” to be accepted, one of which is that access to each other’s markets may in certain ways be less than it is now. Two key aspects of the speech are of particular interest for financial services businesses and their advisers.

Firstly, the Prime Minister reaffirmed that existing models for free trade agreements would not work for the U.K.-E.U. agreement as they would significantly reduce market access for both sides. The U.K. will be seeking “the broadest and deepest possible partnership, covering more sectors and co-operating more fully than any free trade agreement anywhere in the world today”. The Prime Minister questioned the logic of suggestions by the European Commission that only an “off the shelf” trade agreement will be available of to the U.K., pointing out that the European Council’s guidelines aspire to a balanced, ambitious and wide-ranging deal with common rules on a number of areas to ensure fair and open competition. The Prime Minister envisages that the “deep and comprehensive” agreement with the EU will need to include commitments reflecting the extent to which the U.K. and EU economies are entwined. Disputes should be settled by an independent arbitration mechanism, as is common in free trade agreements, in order that the sovereignty of both the U.K. and the EU can be respected – it would not be acceptable for disputes to be settled by the court of either party.

Secondly, the Prime Minister confirmed that the U.K. would not be seeking passport rights for financial services, as these rights are intrinsic to the EU single market. The U.K. will not be seeking to retain single market membership, as this would require it to implement new EU legislation automatically without having had input into the drafting of that legislation. The UK cannot simply be a “rule-taker” while it bears responsibility for financial stability of the world’s most significant financial centre and its taxpayers bear the associated risk. The Prime Minister stated that the U.K. and EU will need a “collaborative, objective framework that is reciprocal, mutually agreed and permanent and therefore reliable for businesses”. Access to each other’s markets should be based on the U.K. and the EU maintaining the same regulatory outcomes over time. There would be scope for the U.K.’s Parliament to take decisions in the future over whether to remain in alignment or to accept any consequences – such as loss of market access – should it diverge.

The U.K. Chancellor of the Exchequer is expected to deliver a speech on March 7, 2018 setting out in greater detail the U.K. Government’s view of how it is possible to include services within a future U.K.-EU trade deal.

 View the Prime Minister's speech.