UK–EU future relationship: financial services

For detail on what the UK–EU Trade and Cooperation Agreement means for services trade between the UK and EU, please read our analysis of the deal.

How did UK–EU financial services trade work before Brexit?

Before the end of the transition period, the UK’s financial services trade with the EU was based on ‘passporting’. This allows firms in one EU or European Economic Area (EEA) member state to apply to their national regulator for a range of ‘passports’ indicating that they meet shared EU regulatory and supervisory standards in certain areas. These passports allow firms to establish branches elsewhere in the bloc and trade across borders with minimal further regulatory permissions.

The UK’s decision to leave the EU single market meant the end of passporting.

What options were available for trade in financial services with the EU after Brexit?

World Trade Organization (WTO) terms: Countries outside the European Economic Area (EEA), or ‘third countries’, typically do business with Europe on the terms outlined in the WTO’s General Agreement on Trade in Services (GATS). There are significant limitations on cross-border trade compared to passporting, and stricter regulatory requirements and supervisory oversight of the EU branches of UK banks. Both sides are also able to impose measures for ‘prudential reasons’ such as ensuring the stability of the financial system, which can lead to further restrictions.

Equivalence: Some third countries receive preferable access to EU markets on the basis that their laws and supervisory frameworks are deemed ‘equivalent’ to the EU’s, although this access is narrower than that offered by passporting. There are different equivalence regimes for different parts of the financial services sector, which means the EU typically makes a range of equivalence decisions. Some financial services, including basic banking services such as lending and deposit-taking, are not covered by equivalence regimes at all. The Commission can unilaterally withdraw equivalence decisions with 30 days’ notice.

Free trade agreement (FTA): Other third countries have attempted to cover financial services as part of a broader FTA with the EU. The Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada is the most recent example of this.

What did the UK and EU agree on financial services?

At the start of the Brexit process, the UK hoped to negotiate a bespoke agreement on financial services that went beyond the standard arrangements usually offered to third countries and retained some of the benefits of passporting. However, the EU was unwilling to offer this.

As a result, the UK–EU Trade and Cooperation Agreement (TCA) contains few provision on financial services, leaving trade to be managed through mutual unilateral equivalence decisions. The two sides also signed a memorandum of understanding (MoU) on regulatory co-operation in March 2021.

At the end of the transition period, the UK replicated much of the EU ‘equivalence’ framework in domestic law. As of January 2021, the UK had granted the EU 27 equivalence decisions^[1] – based on a framework for third country access to the UK financial markets set out in November 2020 – allowing EU financial firms access to parts of the UK’s financial markets, so long as they meet the criteria. The UK’s methodology resembles the EU’s equivalence framework.

But the EU has yet to make equivalence decisions for the UK (except for two temporary decisions granted at the end of the transition period, one of which expired at the end of June 2021). This means that UK firms’ access to EU markets depends on the rules each member state applies to third country businesses.  

The financial services sector will also be affected by the mobility provisions in the TCA. It allows firms to send employees to deliver services in the EU, subject to conditions, with the exact rules varying between each member state

What impact has Brexit had on the UK’s financial services sector?

Since the end of the transition period, some business previously conducted in London has moved to the EU or other global financial hubs, such as New York. In January, Amsterdam replaced London as the primary location for European share trading^[2], while London’s derivative trading platforms lost three-quarters of their euro volumes to Amsterdam and New York.^[3]

Around 7,600 financial services jobs have moved from the UK to the EU since 2016, according to research produced by professional services firm EY in March 2021.^[4] However, this is far less than the 100,000 losses suggested during the referendum campaign and represents a small proportion of the 1.1 million UK jobs in the sector.^[5]

Figures from the Office for National Statistics suggest there has been a realignment of UK trade in financial services away from the EU towards other markets since the end of the transition period. UK imports of financial services from the EU declined by 35.2% over the same period, possibly due to factors associated with Brexit (although Covid’s impact on the economy and international travel has also played a role). The share of UK financial services imports from non-EU countries such as Singapore and South Korea increased over the same period.^[6]    

What are the government's plans for the financial services sector post-Brexit?

As substantial equivalence decisions from the EU seems unlikely, the UK government has indicated that it will change the UK’s financial services regulatory regime in the hope of delivering a Brexit dividend.

In July 2021, the chancellor used his Mansion House speech (and accompanying paper A new chapter for financial services) to set out a vision for the sector. This included commitments to implement at least parts of two government-commissioned reviews: the Lord Hill review on the UK’s companies listing regime and the Kalifa review on Fintech. The government hopes that reforming financial services regulation will help firms trial technological innovations and scale up new products, helping the UK carve out a ‘first mover’ advantage by acting quickly to set up new regulatory regimes that attract firms to launch new products and innovate in the UK over other countries. It also hopes reforms could drive the financial sector to help deliver the UK’s net zero ambitions.

Some reforms would amend EU financial regulations that have attracted most vocal criticism from the sector, such as Solvency II. These rules cover prudential regulation in the insurance sector have been criticised for not taking sufficient account of the specific shape of the UK insurance sector. The chancellor also emphasised a wish to pivot away from Europe and instead “push for closer co-operation and more cross-border access with other like-minded financial centres in markets around the world”, citing the US, Singapore and Switzerland.

1. HM Treasury, Guidance Document for the UK’s Equivalence Framework for Financial Services, 9 November 2020, www.gov.uk/government/publications/guidance-document-for-the-uks-equivalence-framework-for-financial-services
2. Stafford P,  Amsterdam ousts London as Europe’s top share trading hub, Financial Times, 10 February 2021, www.ft.com/content/3dad4ef3-59e8-437e-8f63-f629a5b7d0aa
3. The Economist, Brexit has caused very few finance jobs to leave London 1 May 2021, www.economist.com/britain/2021/05/01/brexit-has-caused-very-few-finance-jobs-to-leave-london
4. EY, EY Financial Services Brexit Tracker: UK Financial Services Firms continue to incrementally move assets and relocate jobs to the EU, but changes since the Brexit deal are small, 2 March 2021, www.ey.com/en_uk/news/2021/03/ey-financial-services-brexit-tracker--uk-financial-services-firms-continue-to-incrementally-move-assets-and-relocate-jobs-to-the-eu-but-changes-since-the-brexit-deal-are-small
5. Treanor J and Farrell S, Brexit could lead to loss of 100,000 financial services jobs, report warns, The Guardian, 14 April 2016, www.theguardian.com/business/2016/apr/14/brexit-could-lead-to-loss-of-100000-financial-services-jobs-report-warns
6. Office for National Statistics, The impacts of EU exit and coronavirus (COVID-19) on UK trade in services: July 2021, www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/articles/theimpactsofeuexitandcoronaviruscovid19onuktradeinservices/july2021