Professor Sarah Hall and Martin Heneghan, University of Nottingham – Written evidence (FTS0029)

 

 

This evidence is provided by Sarah Hall, a Senior Fellow at UK in a Changing Europe and a Professor of Economic Geography at the University of Nottingham and Martin Heneghan, Researcher, University of Nottingham.

 

The evidence draws on our recently published research on ‘The Brexit trade deal and financial services’[1] ‘The Brexit deal and the services sector[2] and our recent report ‘Services and Brexit’ published by UK in a Changing Europe[3]

 

The evidence concentrates on cross-cutting issues, financial services and professional and business services. We are happy to provide further information as required.

 

Summary

 

  1. Professional and business services are strategically important in the UK economy and have built up substantial export markets to the EU during the UK’s membership of the single market.

 

  1. Whilst the UK-EU Trade and Cooperation Agreement (TCA) does cover services trade, in practice, services trade will be more fragmented in terms of EU market access under the TCA as compared with single market membership. Market access can be thought of as a patchwork that now varies by service type, mode of service supply and member state under the TCA.

 

  1. This adds complexity and hence cost for service firms. Larger multinational firms are more likely to be able to access the HR and legal advice needed to successfully and efficiently navigate this form of market access compared to smaller firms.

 

  1. Uncertainties remain regarding the future trading relationship between the UK and the EU. In particular, market access for financial services is not addressed in the TCA. Moreover, some aspects of the provisions made in the TCA have yet to be fully tested in practice. This is particularly true in relation to the mobility of individuals and professionals to deliver services cross border because of the significant limits to business travel since the 1 January 2021 due to the Covid-19 pandemic and associated border restrictions. The UK is also awaiting a data adequacy decision which will have important implications for data transfer and digital trade which are often closely linked to other services.


 

Cross cutting issues

 

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

 

  1. The TCA does not provide the same level of market access for UK-EU services trade as was the case when the UK was a member state. As a result, it brings with it important changes to the ways in which UK services can be provided cross border into the EU. The more limited market access provided by the TCA reflects the fact that the EU’s single market goes much further than is typical of free trade agreements in integrating national service markets and facilitating services trade. This integration is facilitated through country-of-origin principles. In practice this means that a service provided by one member state cross border into another member state is regulated in line with the regulations and laws of the exporting member state. This was particularly important for UK financial services (where this principle is called passporting) and broadcasting, allowing UK based services to sell into the EU market without incurring additional regulatory requirements.

 

  1. Using the country-of-origin approach to access the EU single market, services have developed to be an important export success for the UK economy. For example, in 2019, 35.4% of UK exports in professional and business services (the largest type of UK service export) went to the EU.[4]

 

  1. Some important service sectors are not included in the TCA. For example, audio-visual services and broadcasting, which are an area of export strength for the UK, are excluded from the TCA, in common with other EU free trade agreements.

 

  1. Financial services are only covered minimally within the TCA (this sector is discussed below). In the TCA document which is over 1200 pages long, ‘financial services’ appears six times (‘fish’ appears sixteen times).

 

  1. Although the TCA brings changes in the cross-border trade of services between the UK and the EU, it is important to note that the TCA does include commitments aimed at supporting services trade. The TCA builds on the UK and EU’s commitments under WTO rules to facilitate market access in a range of services, including professional and business services with the aim of supporting existing and new foreign direct investment between the UK and the EU in services. The commitments made to facilitate this include agreements on

 

-          Market access – to ensure that services providers and investors do not encounter limitations to cross border services trade in relation to economic needs tests and limits on the amount of foreign equity required for example

-          National treatment – to prevent discriminatory treatment of the other party’s services suppliers and investors

-          Local Presence - to ensure that requirements for the establishment of businesses by the other party do no inhibit cross border services trade

-          Senior management and boards of directors – to ensure that these are not subject to nationality treatments

-          Most favoured nation – both sides agree to grant services and service suppliers of the other side treatment no less favourable than it grants to its own services and services suppliers, including in relation to any subsequent free trade agreements agreed by either the EU or the UK.

 

  1. However, despite these commitments, in practice, EU-UK cross border services trade is more difficult, and hence most likely more costly, than when the UK was a member state because two of the principles of services trade within the single market no longer apply to the UK: the freedom to establish and the freedom to provide or receive services cross border across the single market. Rather than operating within this single market-wide set of principles, UK services will need to supply services that comply with a patchwork of regulations that differ by each member state that they wish to trade with. This is further complicated because there are a large number of reservations set out in the Annexes of the TCA that again vary by individual EU Member states (discussed in more detail below)

 

  1. Market access for cross border services trade also varies depends on how the service is supplied (the mode of supply). Services can be traded cross border by: firms locating in the markets they want to supply; consumers moving abroad or consuming services overseas (e.g., a British national consuming meals whilst on holiday in Germany); service professionals travelling to deliver the service overseas either through a short business trip, or a secondment; and digitally. Reservations differ by mode of supply, service type and by member state in the annexes of the TCA. This means that in practice, firms seeking to undertake cross border services trade under the TCA will need to consider the service they are providing, how they are supplying it (the mode of supply) and the member state(s) they wish to supply it to in order to understand the variegated impacts of the TCA. Undertaking such planning and changing organisational strategy as a result is likely to be easier for larger multinational companies than smaller companies, particularly in the wider context of strained corporate balance sheets due to Covid-19.

 

  1. This variegated degree of market access (by country, service and mode of supply) is further complicated and may be shaped by other elements of the TCA notably in relation to the mobility of people between the UK and the EU and in relation to the transfer of data (both considered below).

 

  1. The TCA varies in its likely impacts by service sector. It goes further in supporting trade liberalisation in areas including digital trade and intellectual property but new barriers to trade will be more significant in financial and business and professional services. This is important because other business services and financial services are the two largest form of services exports from the UK as shown in Chart 1 below.


 

Chart 1 Breakdown of UK service exports 2019

 

Source: ONS[5]

 

  1. Despite the limitations for services trade associated with the TCA as compared with UK single market access as set out above, the agreement is important because both the UK and the EU are tied into a closer relationship because of the TCA than would have been the case under a no trade deal Brexit scenario. This is particularly important in relation to outstanding decisions with respect to the trading relationship between the UK and the EU, notably equivalence decisions by the EU for financial services and data adequacy decisions from the EU, discussed below.

 

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

 

  1. The TCA adopts a negative listing approach to services trade. This means that initially all sectors are by default open to cross border service suppliers under the same conditions that apply to domestic services suppliers operating in that area. However, the TCA contains an extensive list of reservations in Annexes which set out current or future measures that deviate from the provisions for services trade liberalisation as set out in the TCA.

 

  1. The reservations vary by service type (ranging from professional and business services such as architecture, legal and management consultancy through to health, tourism and cultural services). They also vary by member state. For example, in Croatia, only a lawyer who holds the Croatian title of lawyer can set up a law firm and UK law firms may establish branches but may not employ Croatian lawyers. In France, residency or establishment (a local presence) is required to practise on a permanent basis.

 

  1. This means that a patchwork of variegated market access arrangements by member state, services activity and mode of delivery has replaced the more homogeneous market access that the single market provides.

 

  1. Whilst the TCA does provide greater certainty in terms of the requirements for market access for UK-EU services trade (beyond financial services where important uncertainties remain as discussed below), the reservations mean that understanding the practical implications of the TCA is highly complex and automatic market access in a uniform manner across the EU’s single market for services no longer exists for UK based services. This is particularly true for regulated services firms such as those operating in legal services.

 

  1. In general terms, investment requirements are more liberal than those relating to other modes of service supply within the TCA. This, together with the reservations discussed above suggests that one outcome of the TCA could be a greater reliance by service firms in the UK seeking to service EU markets on creating a commercial presence within the Member States they want to trade with instead of supplying services cross-border as was more typically the case during the UK’s membership of the single market. This is likely to be particularly important in more heavily regulated sectors that relied on passporting such as audio visual and financial services.

 

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

 

  1. The TCA does not make the same provisions for the movement of individuals and professionals to deliver services as was the case during the UK’s single market membership (with the exception of travel to deliver services between the UK and Ireland under the terms of the Common Travel Area). This change is likely to bring significant changes for service businesses. During the UK’s membership of the single market, service firms were able to send staff to EU markets easily and flexibly to deliver projects. Several service sectors in the UK also benefitted from being able to attract EU nationals to work in the UK. This was particularly true in sectors where the UK may have particular skills shortages. For example, 16.9% of employees in London’s financial services sector were EU nationals in 2018.[6]

 

  1. The TCA introduces the commitments on the temporary movement of individuals for business activities that is common in other EU Free Trade agreements. Under these arrangements, the entry into and stay in the single market for UK nationals and their dependents is subject to conditions that may relate to the type of business or services they are providing and limits upon the maximum length of stay.

 

  1. The conditions on mobility for business purposes is complex because it varies by sector, by the type of visit and by the member state being visited. In terms of types of visit the TCA identifies five types: independent professionals, contractual service suppliers, short-term business visitors, intra-company transferees and business visitors travelling in relation to establishment activities. The length of stay permitted within the TCA varies for each of these types of visit. Some form of business trips will also require additional paperwork such as visas and work permits.

 

  1. The varying conditions of business visits by member states are set out in reservations in the Annexes of the TCA. For example, before undertaking work for a paid client in architecture in Finland, the individual service provider will need to demonstrate “specialist knowledge relevant to the service being supplied”. Meanwhile, if a contractual service supplier wishes to sell advertising services in countries such as Denmark or Austria, they will need to meet an economic needs test. Precisely what that involves also varies but it is generally understood as a limiting factor on cross border trade. It can also include needing to advertise first in the market that the services supplier wishes to sell service into to demonstrate no one in that member state market would be able to provide the service.

 

  1. Once entry requirements have been met, service suppliers from the UK are able to stay for the length of their contract. In the EU, but this also varies by member state. For example, UK services providers operating in Austria will be unable to stay for longer than six months in any twelve-month period, or for the length of their contract, if that is longer than six months. The equivalent time cut off in the Czech Republic is 12 months (or for the length of their contract if that is longer).

 

  1. The requirements to obtain a work visa vary by mode of service delivery and country of delivery under the terms of the TCA. For contract service suppliers, individuals require a university degree or equivalent, three years’ experience and any additional professional qualifications required at the member state level. For independent professionals, the same applies but individuals will require six years of experience.

 

  1. The complexity and variability in requirements for business travel to deliver services by service type, type of visit and member state being visited will require additional support from Human Resources and legal teams. This is likely to be more readily available to larger, multinational firms compared with smaller, more specialist service firms in the UK.

 

Financial Services

 

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

 

  1. Financial services are included within the TCA but the impacts of this in practice in facilitating market access for UK financial services firms into the EU are limited because the deal contains a prudential carve out. This means the UK and the EU can unilaterally set requirements in areas such as ongoing supervision, which can significantly restrict financial services trade.

 

  1. Most notably, from the 1 January 2021, UK financial services firms are no longer able to use passporting to service EU markets from a UK base. Under passporting arrangements, financial services firms registered in the UK could access the single market without the need to obtain additional regulatory clearance and licenses in EU member states. This is significant because passporting had been an important element in stimulating the export success of financial services. It is estimated that around 40% of the sector’s exports go to the EU.[7]

 

  1. In order to continue to access the single market without passporting, UK based financial services firms will either have to comply with the different requirements of individual member states or rely on equivalence decisions. Neither is a like for like replacement for the EU wide common access facilitated through passporting. Seeking permissions on a state-by-state basis would add complexity and hence costs for financial services firms.

 

  1. Meanwhile equivalence does not cover the same range of financial services activities. Core banking services such as lending, payments and despot taking are excluded, for example. Neither do they guarantee permanent access rights. The EU can withdraw equivalence determinations with 30 day’s notice.

 

  1. The TCA does not and was not intended to include the outcome of equivalence decisions. Given the importance of equivalence for continued market access, the UK and the EU agreed in the 2019 Political Declaration to try to conclude their equivalence determinations by mid-2020. This ambition was not met.

 

  1. In November 2020, Rishi Sunak announced that the UK would be granting equivalence from 1 January 2021 to EEA based financial services in areas such as credit ratings agencies and derivatives trading. To date, the EU has taken a more cautious approach and only granted time limited equivalence decisions for derivatives clearing (for 18 months) and settling Irish securities (for 6 months).

 

  1. Whilst equivalence is not negotiated and isn’t therefore formally part of the TCA negotiations, the TCA offers the possibility that favourable equivalence decisions for UK financial services firms may be made relatively quickly by the EU. Certainly, one might have expected far more problems in the event of a no deal outcome.  Indeed, the European Commission explicitly identifies future equivalence decisions in financial services as one of the potential unilateral measures that the EU can adopt within a wider set of ‘pillars of cooperation’ with the EU.[8]

 

  1. However, the TCA provides few concrete signs that the 28 outstanding areas of equivalence being considered by the EU will be resolved imminently. The EU has stated that it requires further information in order to make these decisions, particularly in relation to potential regulatory divergence by the UK from the EU in the future.[9]

 

  1. In the absence of outstanding equivalence decisions, from the 1 January 2021, financial services trade from the UK to the EU has been based on more limited single market access than firms based in other leading financial centres such as New York and Singapore. The UK has implemented a Temporary Permissions Regime to support EEA based firms operating in the UK with a passport. There is no equivalent EU wide scheme for UK firms operating in the EU although some member states such as Ireland and Denmark have established temporary permissions in particular parts of financial markets for specific periods of time from 1 January 2021.

 

  1. The TCA is accompanied by a non-binding Joint Declaration committing the UK and the EU to cooperation on matters of financial regulation. This is intended to be facilitated by a Memorandum of Understanding due to be agreed by March 2021. This will not be unique to the UK - similar commitments are in place currently between the EU and the US and Japan for example.

 

  1. A general commitment to regulatory cooperation is not the same as the certainty of single market access provided for within the single market for UK financial services firms. Many have already planned for this eventuality by moving parts of their operations to cities such as Paris, Frankfurt, Amsterdam and Dublin. This suggests that equivalence is a perishable good and its value for UK financial services will decline over time. This is because once firms start to make changes to their operations in the absence of equivalence, it could be costly to reverse these should a future equivalence decision be forthcoming.

 

  1. The TCA also raises an important domestic policy issue for the UK. How is the government intending to use its newfound regulatory control of the financial services sector? Throughout the Brexit negotiations, different policy goals have been floated. The Treasury has emphasised a commitment to an internationally open financial system, noting the importance of ensuring that the UK adapts its regulatory framework to support this ambition.[10] Meanwhile Rishi Sunak has identified the importance of enrolling finance into wider green economic recovery policies and supporting the development of digital finance.[11]

 

  1. These different versions of post Brexit UK financial services are not necessarily mutually exclusive. But providing clarity on how domestic regulatory control will be used alongside the terms of future single market access for UK financial services firms will likely shape post Brexit financial services in the UK more profoundly than the TCA.

 

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

 

  1. Financial services will also be impacted by changes to individual business travel requirements, particularly in relation to legal services which are closely involved in the delivery of financial services and provisions in relation to data flows between the UK and the EU as discussed below.


Professional and business services

 

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

 

  1. Whilst the UK was a member of the single market, it was relatively easy to travel to do business in another member state, and UK professional qualifications, such as those needed to practice as a lawyer, or an architect were recognised throughout the EU.

 

  1. This was particularly valuable for what are known as regulated professions. A regulated profession requires individuals to be authorised to provide the service in a particular country and meet the regulatory requirements of that country to do so. This includes lawyers, accountants and architects, who are typically allowed to practise and use a professional title only once they have undertaken approved education and training. This system of authorisation is typically nationally based so that someone trained and qualified in one country cannot automatically practice in another.

 

  1. From 1 January, UK nationals (irrespective of where they acquired their qualifications) and EU citizens with qualifications obtained in the UK will typically need to have their qualifications recognised in the relevant Member State on the basis of each country’s existing individual rules applicable to the qualifications of third country nationals. There is a framework for the potential future mutual recognition of professional qualifications through the partnership council. However, this has not been in place since 1 January 2021

 

  1. The UK negotiating mandate went further than is typical of FTAs in this area setting out a ‘pathway’ aimed at greater continuation of the single market to the cross-border recognition of qualifications. This was not agreed in the deal.

 

  1. This adds considerable additional barriers to cross border service provision because the rules on such recognition vary by state and sector. In the case of legal services, for example, lawyers holding UK qualifications that were not recognised by 1 January would need to be resident in the Czech Republic in order to advise on UK law but in Austria, they could not be resident and instead will need to provide legal advice cross border from the UK.

 

  1. Mutual recognition of professional qualifications was not widely anticipated to be included within the TCA and service firms have planned accordingly. For example, in the case of legal services in particular, some legal service providers have taken advantage of their ability to transfer to the Irish roll of solicitors under the Qualified Lawyers (European Communities) Regulations 1991 (S.I. No. 85 of 1991) (“the 1991 regulations”). This will enable them to retain a legal qualification that is recognised across the EU/EEA once the transition period ends. In total, 4,000 solicitors from the UK have now been admitted to the Irish roll since the start of 2016.[12]

 

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?

 

See above discussion on national reservations within the TCA.

 

Data and digital services

 

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. In the run up to the TCA being agreed, there were concerns that the UK could face considerable data disruption in commercial and law enforcement areas without the data bridge. Cross-border data flows are increasingly essential to facilitate international trade in services. The need for cross border data flows ranges from the transfer of personal data about customers or workforces in order to offer services through to basic internal processes such as cloud-based email or cloud-based file storage. Financial services and the telecommunications sector are particularly data intensive. For example, the movement of personal data is an integral aspect of modern banking procedures, including in the area of fintech in which the UK has global competitiveness. The operation of retail and corporate accounts relies on the transfer of personal data as part of its routine operations[13]. Data is routinely transferred across territories to be processed in specialist facilities. This specialisation reduces the overall cost of banking.

 

  1. In the absence of an adequacy decision, though still possible, flows of personal data from the EEA to the UK would be considerably impeded. They will need to abide by Article 46 of the GDPR, which stipulates that transfers of personal data to a third country must provide appropriate legal safeguards. The most commonly used legal safeguard are Standard Contractual Clauses (SCCs). The implementation of SCCs is a costly legal process that requires written agreements from both the sending and receiving parties. It puts the onus on individual businesses in the EEA and UK to facilitate the legal transfer of data. Larger multination firms are likely to be better able to access the legal advice needed to establish SCCs, as compared to smaller firms.

 

What impact will the arrangements agreed have on digital trade and trade in digital services between the UK and EU

 

  1. The TCA goes further than other EU trade deals in a number of areas on digital trade. The inclusion of an entire chapter devoted to digital trade is a signal that the commitments are more comprehensive than other trade deals.

 

  1. The TCA is more accommodating of data flows than other EU trade deals. For example, it includes an explicit ban on data localisation. This means that UK and EU based companies cannot request that data be stored in a specific jurisdiction. The TCA facilitates digital trade by giving equal treatment to electronic contracts and signatures versus in relation to paper-based documents. It also allows digital services to be the default without prior authorisation.

 

  1. The TCA is forward looking on emerging technology and regulatory cooperation. It contains a positive obligation for the UK and EU to cooperate on emerging technologies such as AI and quantum computing. It aims to foster dialogue on how to regulate emerging technologies alongside cooperation on the research and development of new technologies. Review clauses in the digital chapter will facilitate an update to the chapter as technology evolves and changes the environment in which the original chapter was developed. This is important because digital trade and services are developing rapidly. The UK’s use of regulation to support the development of fintech demonstrates the value in having a dynamic approach to regulation in this area.

 

  1. Data adequacy is not included in the agreement. An adequacy decision would allow for personal data to flow from EU states to a non-EEA country deemed adequate in terms of the level of protection of personal data within that country’s domestic law. But the ‘Declaration on the Adoption of Adequacy Decisions with Respect to the United Kingdom’ makes clear the EU’s intention to ‘promptly launch the procedure for the adoption of adequacy decisions with respect to the UK under the General Data Protection Regulation and the Law Enforcement Directive, and its intention to work closely to that end with the other bodies and institutions involved in the relevant decision-making procedure’.

 

  1. There is a four-month period to facilitate the continued transmission of personal data from the EU to the UK. This is based on the UK being categorised as an adequate jurisdiction by the EU provided that the data protection legislation of the UK remains unchanged from 31 December 2020. The interim period can be extended by two months and will end when the European Commission makes a decision on adequacy. Uncertainty with respect to digital trade and services therefore remains pending the EU’s adequacy decision.

 

February 2021

 

 

 

 

 

 

 

11

 

[1] https://ukandeu.ac.uk/what-does-the-brexit-trade-deal-mean-for-financial-services/

[2] https://ukandeu.ac.uk/the-brexit-deal-and-services/ /

[3] https://ukandeu.ac.uk/research-papers/services-and-brexit/

 

[4] https://www.ons.gov.uk/businessindustryandtrade/internationaltrade/datasets/uktradeinservicesservicetypebypartnercountrynonseasonallyadjusted

[5] https://www.ons.gov.uk/businessindustryandtrade/internationaltrade/datasets/uktradeinservicesservicetypebypartnercountrynonseasonallyadjusted

[6] https://www.ey.com/en_gl/financial-services-emeia/brexit-immigration-implications-for-fs-and-fintech

[7] https://www.ons.gov.uk/businessindustryandtrade/internationaltrade/bulletins/internationaltradeinservices/2018

[8] https://ec.europa.eu/info/sites/info/files/eu-uk_trade_and_cooperation_agreement-a_new_relationship_with_big_changes-brochure.pdf

[9] https://ec.europa.eu/commission/presscorner/detail/en/qanda_20_2532

[10] https://www.gov.uk/government/publications/guidance-document-for-the-uks-equivalence-framework-for-financial-services

[11] https://www.gov.uk/government/speeches/chancellor-statement-to-the-house-financial-services

[12] https://www.lawgazette.co.uk/news/record-year-for-uk-solicitors-seeking-irish-brexit-backstop/5102348.article

[13] https://www.ukfinance.org.uk/sites/default/files/uploads/pdf/BQB5-Data-protection-and-transfer-NEWER-FINAL.pdf