The TCA only provides basic provisions for financial services on issues like national treatment and licensing and contains fewer commitments than the EU-Japan Free Trade Agreement. However, the are very few examples where banks have explicitly exited from businesses, markets, or clients and the financial services industry has adapted well to changes. Significant work was done by cross-border financial services firms in establishing new EU entities, expanding existing ones, or increasing UK entities to ensure continued business under a very different jurisdictional setup once the UK had left the single market. Over the last few years, at the official level, the relationship between regulators was maintained at a high level and recent increased diplomatic activity is encouraging.

Impact

• According to the Bank for International Settlements (BIS), the UK has lost around a fifth of its European share of trading in euro-denominated derivatives.
• Approximately 500 firms with nearly £1 trillion in capital on the move, which is often has to be split among multiple locations.
• Initial estimates suggested around 100,000 jobs moving from the UK to the EU. However, EY estimates just over 7,000 jobs had moved as a result of Brexit.
• Firms that used London as their gateway to the EU are now having to negotiate individual arrangements with member states, each of which has its own approach.
• The UK and EU frameworks are diverging in parallel because they are reviewing many of the same issues and there will now be competition between the UK and the EU.

The EU and Financial Services

• The EU’s aim is to onshore as much of its own business as possible, rather than challenge London as a major international centre. It wishes to preserve the Single Market and guards market access for third countries.
• There is no single natural home financial services in Europe. Locations were widely spread-out including Brussels, Dublin, Paris and Luxembourg.
• France is the largest financial and banking capital market centre in the EU and the French voice is particularly dominant.
• EU is against exporting large risks however they cannot adequately manage them. Risks are growing due to factors like climate change and cyber-attacks and the EU requires capital that sits in the London insurance market.
• EU’s ambition is to build up internal capacities to channel EU savings into EU investments, and will require access to global pools of capital including London.

The UK and Financial Services

• The UK has a trade surplus in financial services, with £61 billion in exports and only £16 billion in imports, resulting in a surplus of £44 billion. The EU still accounts for 34% of the UK's exports in financial services. Since the referendum, the EU has moved from being our largest trading partner in financial services to number two, but it remains incredibly important.
• The UK aims to retain regulatory autonomy and the future for London lies in being a major international centre rather than a centre for European business.
• The UK has an advantage in how quickly it can respond to innovation in financial services, particularly in areas like digital technology, AI, and sustainability compared to EU and US.
• Reverse solicitation/ reverse branching
  • To bring the business back to the London market, companies have had to create a UK branch of European subsidiaries. In some areas, reverse solicitation/branching may be sufficient, but in many other areas it is not. The arrangement is legally ambiguous and regulators do not have a clear view on it. While it's operational and working, the arrangement is fragile. Some EU member states countries are already looking at these reverse branching arrangements.

Equivalence

• The UK has granted significantly more equivalence decisions to the EU than vice versa. The EU has only granted time-limited equivalence decisions for clearing and data transfers, no further equivalence decisions are forthcoming. Even if all the equivalence decisions were granted it would not replicate single market access.
• EU will only grant or maintain equivalence decisions when it’s in its interest.g. temporary equivalence determination for CCPs were on the basis of financial stability and the good working of EU markets.
• Other equivalence decisions are no longer a priority; the financial services industry has moved on. If they had been granted immediately, the sector would have wanted them, and it would have been a good way for the EU to tie the UK regime closely to it.

UK-EU MoU on Financial Services Cooperation/ EU-UK Financial Regulatory Forum

• The most important aspect of the TCA for the financial services industry is the financial services Memorandum of Understanding. It was agreed in June 2023 and established the EU-UK Financial Regulatory Forum.
• The Forum will hold its first meeting in October. Expectations are not high for the first meeting but important that it goes well to set a good baseline, strengthen trust and build a good foundation.
• In the medium to long term, the forum could be upgraded to function like an international standard-setting body. Parties could commit, cooperate, and agree on standards while retaining their autonomy. Take advantage of the MoU in providing a political forum for discussions.
• TCA review is an opportunity change the text concerning the Forum and establish a sub-structures in areas such as cybersecurity, sustainable finance and data.

Data Adequacy 

• Data adequacy is crucial area, not just for financial services. Retaining data adequacy is hugely important for the UK financial services industry. The UK-Japan FTA had a more ambitious set of rules on data exchange than the UK-EU.The City of London Cooperation stated “It's a top priority for us to maintain the data adequacy decision.”

Lugano Convention

• Significant concern initially, largely due to the uncertainty it create but, it has turned out reasonably well. Rejoining Lugano would be welcome as it eliminates an additional layer of uncertainty.

Temporary Permissions Regime (TPR)

• Large firms do not use it but small firms doing marginal business in the UK do. Extending the TPR to 2026 demonstrates show intent and willingness and creates another point of negotiation alongside TCA review, fisheries etc.

A bilateral focus

• Enhanced UK-EU financial services cooperation is rising up the agenda in a small number of EU member states. The UK needs to focus on diplomatic efforts with EU member states that want closer bilateral relationships in financial services with the UK. Particularly Luxembourg and to a lesser extent the Netherlands, Ireland and some of the Scandinavian states.

Mobility: intra-company transfers and short-term business mobility.

• Article 140 in the TCA covers short-term business travel, allowing for 90 days within a 180-day period. Complexity and variation of rules between EU27. E.g. bank wanting to send an investment banker to a client in one member state might be allowed to send that person unaccompanied. In another member state, that individual might need to be chaperoned by a local representative. It is often easier to bring someone from the US to Germany than it is from the UK
• Complex for people coming to the UK. E.g. US banks bring salespeople from EU to the UK presents significant compliance challenges including as whether they have to report to the FCA or their home authorities and what kind of phone calls they can make.
• For corporate secondments, explore the opportunity for a quid pro quo, perhaps similar to the UK-Japan agreement, regarding corporate secondments.

Financial Services and Markets Act 2023

• Although early, overall the sector it supportive of the direction coming from that Act and how it is being implemented. The act has also helped with the EU relationship by providing legislative certainty on the direction of travel and serves as evidence against concerns about the UK becoming “Singapore-on-Thames”, which has been very helpful.

Article 46 on MiFID rules

• Article 46 has the most advanced equivalence regime, which closely replicates what we have seen under the single market. However, it has not been activated for the UK or any other jurisdiction. That would be the biggest single thing to make a different to the financial services industry but it is also an ask that least likely to be given.

TCA Review

• The TCA review needs to raise up agenda especially in EU but UK as well. The review and the lead-up to it, will need to be as much a diplomatic exercise as a technical one if it is succeed. There is a consensus that only make incremental changes.

Problems faced by the financial services industry

• The lack of recognition of professional qualifications
• Increased operating costs for conducting financial business across borders.
• Significant rise in operational costs due to the duplication of certain capacities on both sides of the channel
• Frictions in the cross-border movement of people: intra-company transfers and short-term business mobility.
• A clear split of liquidity in certain market segments
• Increased capital requirements due to the need to establish regulated, licensed, and fully capitalised entities in both jurisdictions
• Increased economic costs for end users of financial services and the real economy.

Solutions and opportunities

1. The TCA could be upgraded or enhanced through a bespoke agreement, either incorporated into the TCA or sitting alongside it.
2. Recognition of professional qualifications and legal services: There is an opportunity to examine the text and reduce Member State reservations on home title practice, which might actually be achievable.
3. Data adequacy question: Establishing a dedicated forum to talk about this might be a good way forward.
4. Focus on bilateral cooperation with individual member states: Luxembourg, Netherlands, Ireland, and Scandinavia.
5. Diplomatic effort and dialogue are crucial to rebuild trust.
6. Build the EU-UK Financial Regulatory Forum into an international standard-setting body and establish substructures for cybersecurity, sustainable finance, and data.
7. Utilise the UK's quick response advantage to innovation in financial services compared to the EU and the US.
8. Change mindset: Think about the future of UK-EU financial services in the same way that the UK would with other major jurisdictions.
9. Re-joining Lugano to eliminate an additional layer of uncertainty.
10. Extend the Temporary Permissions Regime (TPR) to show willingness and create another point of negotiation alongside TCA review.
11. Seek an agreement to make corporate secondments easier, similar to the UK-Japan agreement.