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BREXIT – Where now for financial services?

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way...

Charles Dickens, A Tale of Two Cities


The tone of the debate between pro-and anti-EU campaigners over the last few years brings to mind the opening lines of A Tale of Two Cities. They seem to be particularly apt, given that the Two Cities were London and Paris, and they also encapsulate the directly opposing views of the protagonists on either side of this acrimonious divide.

But the primary issue is now resolved. The United Kingdom departed from the European Union on 31 December 2020. In the interests of all, it is now necessary to try to make Brexit work.

It is well known that the UK economy is now primarily based on services and that, more specifically, the financial services sector accounts for approximately seven per cent of national economy. This is significant both for financial service providers in the UK, and for users of those services based in the remaining EU Member States. In view of those considerations, it might have been expected that financial services would have played a prominent part in the arrangements for the UK’s withdrawal from the EU. In fact, this was not the case, but the present note seeks to provide a brief overview of the relevant provisions and to examine the implications for UK financial services firms.

Withdrawal Agreement

In October 2019, the UK and the EU agreed to a revised Withdrawal Agreement and associated Political Declaration. The Withdrawal Agreement itself does not address trade-related matters, but paragraph 27 of the Political Declaration contemplates “…ambitious, comprehensive and balanced arrangements on trade in services…. respecting each Party’s right to regulate…” Paragraph 28 confirms that this ambition extends to financial services, whilst paragraphs 31 and 32 confirm the principle of regulatory autonomy in relation to such services.

Perhaps more significantly, paragraphs 35—37 of the Political Declaration record that the parties may extend equivalence of treatment to financial institutions based in the territory of the other party. However, the granting of equivalent treatment – and the advantages that flow from it—are a matter for the discretion of the granting party. They may also be withdrawn at any time on a unilateral basis. The equivalence arrangements thus do not of themselves confer rights on institutions based in other countries.

Trade and Cooperation Agreement

The Trade and Cooperation Agreement finalised over the Christmas period runs to some 1,246 pages. Yet, despite its length, the Agreement maintains the rather desultory approach to financial services.

Part Two, Title II of the Agreement deals with services and investment, and section 5 of that segment deals specifically with financial services. But there is little that is of real assistance to UK financial institutions on the context of their post-Brexit activities. For example:

  • Article 5.41 includes a general commitment to adhere to internationally agreed standards for the prevention of money laundering and tax evasion – in particular, the standards set by the Financial Action Task Force;
  • Article 5.42 provides for mutual licensing of UK/EU financial institutions on non-discriminatory terms;
  • Article 5.44 provides for non-discriminatory access to payment services systems operated by central banks; and
  • Perhaps slightly more encouragingly, a Joint Declaration on Financial Services Regulatory Cooperation annexed to the Agreement provides for the parties “…to establish structured regulatory cooperation on financial services, with the aim of establishing a durable and stable relationship between autonomous jurisdictions…” The parties are to agree a Memorandum of Understanding to establish the required framework by March 2021. The Memorandum is to deal with equivalence determinations between the EU and the UK, but the Joint Declaration reiterates that equivalence will remain a unilateral and autonomous decision-making process for each party. It therefore seems to be clear that – whatever its ultimate content – the Memorandum will fall well short of the mutual recognition and passporting arrangements that applied up to the end of the Brexit transitional period.

As will be seen, the above provisions amount to gruel of the thinnest variety. The items included within the Agreement are of limited significance, and it is the omissions that are of far greater significance. In particular, the passporting system has now ceased to apply to UK-authorised institutions. Many UK banks and investment firms have relied on this system to provide services to EU-based customers for some 30 years. In doing so, they have been able to rely on their UK authorisation without seeking further licences in the destination EU Member State.

The loss of passporting rights may not greatly matter to large international institutions, which will already have locally authorised subsidiaries in one or more EU Member States. But it may be a major loss to smaller, UK-centric investment firms that do not have an international network of offices and which have therefore relied exclusively on the services passport.

Loss of the services passport

It has long been assumed that UK-authorised firms would cease to enjoy the benefit of the services passport once the Brexit transition period had expired. This point has now been finally confirmed and it must be doubtful whether the required negotiation of further rules on equivalence will significantly enhance the position of UK firms. In the absence of a network of EU subsidiaries, how does such a firm continue to service its EU-based clients? Two options have been suggested.

The first approach (reverse solicitation) depends on the argument that a UK firm does not need to be authorised in – say - Germany in order to offer services to a German client, provided that the initiative for the service results from an approach by the German client. However, even if that legal analysis is correct, reverse solicitation would only cover German clients who approach the UK firm. It would not cover German clients who are the subject of a directed marketing call by the UK firm. Consequently, the concept of reverse solicitation is of limited scope.

The second approach (characteristic performance) is potentially of wider application. It operates on the basis that certain financial services (e.g. current accounts and other banking services) are provided in the country in which the service provider is itself located. On this basis, a UK bank providing an account to a customer in Germany is providing that service in the United Kingdom and, as a consequence, no licence should be required from the German authorities for that purpose. The advantage of the characteristic performance approach is that it does not generally depend upon solicitation by the client, and could therefore extend to clients acquired through the firm’s own marketing activities. However, the difficulty in this context is that not all EU Member States adopt a uniform approach to the characteristic performance test. The problems are illustrated by the recent and well-publicised decisions of various UK banks to cease offering account services to UK customers resident within certain EU countries. Those banks could have invoked the characteristic performance route as a means of maintaining those accounts, notwithstanding the loss of their EU services passports. However, this may have led to disputes with national regulators that were not felt to be justified in a wider context.


UK-based banks and investment firms clearly face difficult challenges in establishing and maintaining relationships with EU clients in the post-Brexit era. Unfortunately, the signature of the Trade and Cooperation Agreement has done little to alleviate those problems.

UK firms will therefore need to develop processes to ensure that their client relationship and marketing activities within EU Member States remains compliant with EU and national requirements and restrictions, bearing in mind that the UK now ranks as a “third country” in relation to those legislative frameworks.

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