Fixing financial services deal central to overall agreement on Brexit, says Lougher

Guy Lougher of Pinsent Masons, the law firm behind Out-Law.com, was commenting after it was reported that the UK government looks set to pursue "mutual recognition" of financial services regulations with EU officials.

The mutual recognition model would require the UK to maintain financial services rules that closely mirror those that apply in the EU post-Brexit. The Financial Times reported that UK chancellor Philip Hammond could confirm the reported preference as early as next week.

"The issue of continuing UK access to EU markets for the supply of services, and especially financial services, is one of the knottiest issues in EU/UK negotiations, possibly eclipsed only by the issue of the border between Northern Ireland and Ireland," Lougher said. "It is no surprise therefore that the UK is keen to pursue a strategy of mutual recognition, as a way to try and safeguard the UK’s financial services industry." 

"It remains to be seen whether the EU will consider such a way forward as an acceptable compromise or whether it will be rejected as an attempt by the UK to cherry-pick access to valuable EU markets," he said.

Last month, a UK parliamentary committee issued a detailed report which called a Brexit deal between the UK and EU to provide financial services institutions with "mutual market access".

The House of Lords European Union Committee said that the UK government should not accept a future relationship where the UK relies on a designation from the EU that the UK's financial services framework is 'equivalent' to that of the EU.

Financial regulation expert Elizabeth Budd of Pinsent Masons said: "Equivalence is unsatisfactory since it is a patchwork across a number of EU directives. There is also a very lengthy process to go through in order to achieve equivalence and it is not yet clear if the EU is able to shortcut the process which other jurisdictions such as the US have gone through and are going through."

Budd also said that the risk of an agreement based on equivalence is that the EU's designation can be withdrawn.

An alternative option that could be applied to post-Brexit financial services arrangements is the 'delegation' model, Budd said.

"Delegation is especially important for investment management but requires a formal process to have been gone through between regulators," she said. "It is relied on heavily by US investment managers for transatlantic business, but again it takes time to enter into the necessary memoranda of understanding which are necessary between regulators."