UK Finance – Written evidence (FTS0027)

 

Introduction

  1.               UK Finance is the collective voice for the banking and finance industry. Representing more than 250 firms, we act to enhance competitiveness, support customers, and facilitate innovation.
  2.               We welcome the opportunity to provide evidence to the EU Services Sub-Committee’s inquiry into “Future UK-EU relations: trade in services”. Please note that we have only provided responses to those questions most relevant to our members and the banking and finance sector.

 

 

Cross-cutting issues

 

1. What is the impact for trade in services of the UK and EU reaching a free trade agreement?

 

  1. The EU-UK TCA is a conventional FTA in that its coverage of services trade is largely limited to confirming a range of existing third country rights and treatment on both sides. It also provides guarantees that the two sides will continue to apply agreed standards in services-related regulatory processes such as authorisation or licensing.
  2. The practical impact of this is very limited. It is in essence an insurance policy against any changes to this basic treatment in the EU or UK market by firms of the other side. Having reached an agreement on the future framework between the EU and the UK is nevertheless important, because it provides a governance structure for the services relationship and is the first step to rebuilding the trust and close cooperation that will be important in supporting cross-border trade and investment in financial services, and services more generally.  

2. What effect may national reservations to the UK-EU Trade and Cooperation Agreement have on trade in services with the EU?

 

  1. The reservations are of two types. The first protect existing features of the EU and UK third country services trade framework that are not compatible with the non-discrimination and market access principles in the agreement. They are ‘carve-outs’ from the commitments in the agreement. The second assert prerogatives to alter currently applied rights via discriminatory treatment in the future.
  2. In financial services, the most important reservations in the TCA are of the second kind. Both the EU and the UK have used them to assert the right to impose in the future particular legal forms on financial services firms and to adopt a wide range of potential restrictions on cross border trade, should this be otherwise permitted by national law and regulation. In both cases the motivation is broadly prudential – ensuring that regulators have flexibility to fulfil their mandates.
  3. The effect of the first form of reservation is to confirm that businesses will have to continue to work around an existing feature of the services trade framework that would otherwise be incompatible with the TCA (and WTO) principles. The effect of the second is to create a degree of uncertainty about future regulation and the possibility of either side adopting discriminatory practice in the future.   

3. What effect will arrangements on the mobility of professionals have on trade in services between the UK and EU?

 

  1. The provisions in the TCA on professional mobility are modelled on previous EU commitments of this kind. These define some categories of short-term visitor, including secondments and intra-corporate transfers of highly skilled employees, and the terms of their permitted stays in the EU/UK. This does not establish a new framework in itself; rather it confirms some of the principles that will apply to that framework. The framework will be set by the migration regimes of the UK and the individual member states, and the short-term business travel arrangements adopted by the two sides. In this respect it is welcome that both sides are committed to a visa-free travel regime. 
  2. The end of freedom of movement will inevitably impact the way in which services firms on both sides recruit nationals from the market of the other and move staff between operations in the two markets. It is vital that the UK’s future regime is an open as possible to temporary transfer of professionals between operations in the two markets and does not place unnecessary costs or limitations on the ability of firms to recruit skilled specialist nationals from the other jurisdiction. Visa-free travel will also be vital for supporting short business visits between the EU and the UK, which can be an important part of supplying many services. 

 

Financial services

 

5. How will the arrangements in the UK-EU Trade and Cooperation Agreement shape UK-EU trade in financial services?

 

  1. The TCA confirms that the UK and the EU will trade financial services on the same basis that the EU and the UK extend to all third countries. In principle, the agreement provides a degree of certainty about this, although in practice much of this reflects commitments already made at the WTO level.
  2. The most important feature of the TCA in this respect is what it does not do. It does not create an alternative framework for guaranteed rights of cross-border supply from the UK to the EU and vice versa to replace the EU’s internal passporting regime. Combined with the EU’s signalling that it is very unlikely to activate its domestic regulatory framework for cross-border supply of a limited set of wholesale financial services activities, this sharply narrows the scope for cross-border contracting in EU-UK financial services trade.
  3. In future, many activities that might have been contracted this way within the single market will now need to be conducted through authorised entities in the other market. Much of the financial services sector’s preparations for Brexit have involved establishing these alternative bases of supply. This will be the key feature of the landscape that the TCA confirms.
  4. There are other aspects of the TCA that are of marginal importance in shaping future arrangements. The agreement confirms some basic standards for authorisation and other regulatory processes, basic rights of data transfer - subject to data protection rules - between the two jurisdictions and some basic principles for professional mobility. The MOU that will be established in parallel to the TCA will provide a framework for regulatory cooperation, which will be valuable.       

6. The Joint Declaration on Financial Services Regulatory Cooperation sets out that both sides seek to establish structured regulatory cooperation on financial services. What form should this dialogue take?

 

  1. The precise form of this dialogue is less important than the general levels of trust, collaboration and transparency that it should express.  In a relationship that is working as the EU-UK relationship must, these forms of structured dialogue are an opportunity for high-level strategic agenda-setting at the level of Ministers and Senior Commission officials. Below this there should be a constant stream of activity involving policymakers, regulators, parliamentarians, civil society and firms. For this reason, a key feature of the forum created by the MOU should be a clear political mandate to establish and sustain a wide range of working groups and work streams as it determines useful. 

 

7. Given the plans to delegate more powers to financial regulators, what form of Parliamentary oversight of these regulators would be appropriate?

 

  1. This is an important question that we will address as part of our response to HM Treasury’s phase-II consultation on its Financial Services Future Regulatory Framework Review, the deadline for which is 19 February. We will send the committee a supplementary submission with our views shortly thereafter.

8. How might the financial services sector be affected by the changes in other, interrelated sectors?

 

  1. Financial services are closely interlinked with a wide range of ancillary services that include professional and businesses services, IT and data services and legal and accountancy services.  Where UK-based financial services firms are required by new arrangements to contract with customers through EU entities this will in some cases require that they contract those services locally from EU or UK firms inside the EU. For these entities, continuing to use UK-based suppliers will depend on the specific cross-border rights available. For unregulated business and professional activities this may be relatively simple, but conditions for regulated sectors such as legal or data services may be more restrictive.  

 

Professional and business services

 

9. How will the new UK-EU framework for the mutual recognition of professional qualifications affect professionals and service sector businesses?

 

  1. The TCA does not establish any mutual recognition of professional qualifications. Rather it acknowledges that such recognition may take place in the future in response to proposals originating in sectoral groups. In practice, EU member state frameworks for mutual recognition of professional qualifications will now be the primary route for shaping professional mobility that depends on qualification-based licensing. In this respect, recognition of professional qualifications is not a central issue for financial services, where authorisation is often based on professional probity and experience rather than dependent on formal recognition of specific sectoral qualifications. 

10. What will be the impact of the Agreement’s provisions on the cross-border supply of services and rights of establishment, such as commitments on local presence and economic needs tests?

 

  1. The TCA provides some basic guarantees for non-discrimination in cross-border supply where it is permitted, but does not necessarily guarantee that such supply will be permitted. In financial services, such guarantees are limited to a small number of areas where the EU and the UK have pre-existing GATS commitments at the WTO level. 
  2. In regulated sectors such as financial services, cross-border supply is generally much more limited than supply through locally-regulated entities established for that purpose. The EU passporting regime in financial services is unusual in this respect and the TCA does not create similar rights. The most important feature of the new arrangements are that they will transfer much activity previously undertaken on a cross-border basis to the commercial establishment channel.
  3. General prohibitions on economic needs test are of course welcome, although they have to be read in parallel with the carve-outs in the TCA’s reservations. 


 

Data and digital services

 

14. The EU has granted the UK a six-month data adequacy ‘bridge’ to allow the free flow of personal data until the EU determines whether or not to grant a data adequacy decision to the UK. How would the absence of a data adequacy decision at the end of this bridging period affect trade in services?

 

  1. Personal data transfer supports trade in financial services by allowing companies to move personal data from an EU-based customer to the UK or between parts of a business with operations in both the EU or the UK. An adequacy determination under the GDPR makes this relatively simple. Without such a determination transfers must be covered by specific contractual arrangements or protocols agreed with data protection authorities on a case-by-case basis. This is feasible in some cases and not in others, but always more complex (and expensive) for both the customer and the business. Where it is not feasible it will require restructuring of data storage and processing practice by UK-based firms.
  2. Our members have been preparing for the risk that data flows between the UK and EU might be interrupted. However, the 2020 ‘Schrems II’ decision of the Court of Justice of the European Union adds additional complexity and uncertainty. If the UK is not ultimately deemed ‘adequate’ by the EU, in addition to the specific contractual arrangements mentioned above, firms would also need to complete a risk assessment in relation to each transfer arrangement. The guidance on these assessments has not yet been finalised but this process is likely to be complex, time consuming and costly.

February 2021