It is just over three years since the UK’s withdrawal from the EU took effect, and almost seven years since the referendum results were announced.  

But the road has not quite been as paved with gold as some promised during the referendum campaign. The UK is now on its fourth Prime Minister in four years with significant turmoil on the domestic and international front at almost every turn.  

However, a proposed resolution to arguments on the customs border of Northern Ireland has been taken by some as a sign that further progress can be made. Despite this, improvements in the relationship on financial services still seem distant. So, what can we say about how things have shaped up? And where might things go from here? 

Initially, hopes had been high (at least on the UK side) that a deal could be struck which maintained as much as possible of the UK’s position at the heart of European financial services. This would ideally allow the continuation of London-based insurers, banks, asset managers, investment firms and the like servicing EU clients with minimal need to move resources to the EU. Ideas floated at the time to achieve this included a Swiss-style arrangement of sectoral deals, enhanced equivalence, or even a Norway-style arrangement.  

What resulted was (perhaps unsurprisingly from an EU perspective) far short of this. For Financial Services, the Joint Declaration on Financial Services Regulatory Cooperation was all that emerged. This was intended to lead to the signing of a Memorandum of Understanding covering aspects of cooperation on financial services by March 2021. Evidently, this has not happened, in part due to the wider disagreements on fishing, Northern Ireland and the general poor state of relations between the two. 

The UK’s standing as a global financial centre was certainly affected by Brexit. However, by some margin, it remains the dominant hub for financial services in Europe. Movements of staff and capital happened, but not nearly at the scale some had predicted, and certainly far shorter than many in the EU would have liked. 

This latter aspect has remained a concern for EU regulators from the outset (both at EU-level and member state-level). Some of this was part of an effort to attract business into member state markets. However, there has been a long-standing concern within the EU about control and oversight of services offered by third countries entities, which has pre-dated Brexit. 

A recent supervisory statement published by EIOPA demonstrated a strengthening of their stance that undertakings operating in the EU should have “an appropriate level of corporate substance within the EU”. This particularly relates to Brexit structures where the fear is that insurers and brokers “…use third country branches to disproportionately perform essential functions or activities” in the EU.  

This clearly raises questions of the structures put in place by many UK-based (re)insurers and brokers following Brexit. Companies using third country branches will need to closely monitor their compliance with regulatory expectations and engage with their host supervisor to ensure compatibility with expectations. This includes that EU entities should be capable of overseeing regulated activities and assume “…full responsibility for effective decision making and risk management”, among other criteria. 

Looking at the wider relationship and how that might evolve, there have been some voices in the UK suggesting that the proposed deal on Northern Ireland could unblock further discussions on financial services. As part of this, there have been renewed suggestions that equivalence may be a way forward for the UK to improve its position in EU markets.  

However, equivalence is often misunderstood outside the EU, and particularly in the UK, as primarily a means for gaining access to EU markets. This is fundamentally not the EU view of equivalence, which is very clearly expressed in a 2017 Commission Staff Working Document on this topic:  Equivalence is not a vehicle for liberalising international trade in financial services, but a key instrument to effectively manage cross-border activity of market players in a sound and secure prudential environment with third-country jurisdictions that adhere to, implement and enforce rigorously the same high standards of prudential rules as the EU. 

The UK and EU respectively are in the process of reviewing their individual versions of key legislation relating to financial services. This includes both Solvency II for insurers and the Capital Requirements Directive and Regulation (CRD/CRR) for banks. While major differences are not expected in this process, some level of divergence is naturally to be expected over time. While this won’t in itself make equivalence or other arrangements more difficult to achieve, it highlights that each has its own priorities. This is particularly true as governments seek to address competitiveness, financial stability and supporting the real economy in the current and evolving economic environment.  

The UK and EU will certainly continue to be closely linked in many important areas. But it’s clear that there are still a few more turns yet in the Brexit saga. The credit and surety sectors have strong bases in both the EU and the UK, as well as relying on connections between them. Those active in these markets will need to maintain vigilance as well as the ability to move flexibly to respond to changing regulatory demands over time. This is particularly true for how changing rules may impact them directly in either jurisdiction (Solvency II), or how it impacts the treatment of their products (CRD/CRR).