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Financial services - EU Dossier 09.07.2020

During the transition period, the United Kingdom takes part in the EU’s Single Market, including the Single Market for financial services.

Therefore, currently, financial services can be provided from the United Kingdom to the EU with a single authorisation or ‘passport’ per relevant financial services area, issued by the UK authorities. Union operators can use the ‘passports’ of their home state to provide financial services to and in the UK.

As of 1 January 2021, authorisations to provide services from the United Kingdom across the EU will stop applying. The provision of financial services from the United Kingdom to the EU will be possible subject to the relevant third country rules of the Member State concerned. Union businesses, banks or investors that currently rely on these services should be aware of this change and prepare accordingly. EU financial services providers with operations in the United Kingdom should also prepare to abide by all relevant UK rules.

Under the equivalence frameworks foreseen in certain Union legal acts, the European Union has the possibility to facilitate specific interactions between the Union and UK financial systems by recognising that the relevant UK regulatory and supervisory regimes are equivalent to the corresponding Union legislation and requirements. Only a limited number of these equivalences allow third-country firms to provide their services to EU clients. Examples include the areas of central securities depositories, and central clearing counterparties (CCPs). Specifically for investment firms, a new, improved equivalence framework will enter into force in mid-2021. In most areas, such as insurance, commercial bank lending or deposit-taking, equivalence does not allow third-country firms to provide services to the EU but provide prudential or reporting reliefs to EU firms.

Union equivalence decisions do not replicate the benefits of the Single Market for the United Kingdom as the obligations and safeguards of the EU’s Single market eco-system will stop applying in the United Kingdom. Equivalence decisions can be unilaterally withdrawn at any time, in particular if third-country frameworks diverge and the conditions for equivalence are no longer fulfilled.

As the Union’s equivalence frameworks are unilateral, neither the equivalence assessments, nor possible decisions for granting equivalence are part of the negotiations with the United Kingdom. The current interconnectedness between the EU and the United Kingdom market requires that the Commission, in assessing equivalence, be particularly mindful of the risks for the EU in terms of financial stability, market transparency, market integrity, investor protection and level-playing field. In addition, the United Kingdom government’s stated intention to diverge from the Union’s regulatory and supervisory frameworks in the area of financial services after the transition period requires that the Commission assess UK equivalence in each area on a forward-looking basis.

The Political Declaration on the future relationship[1] states that both the European Union and the United Kingdom will endeavour to conclude their respective equivalence assessments before the end of June 2020.[2] The Commission shared with the United Kingdom questionnaires covering 28 equivalence areas. By the end of June, only 4 completed questionnaires had been returned. On this basis, the Commission could not conclude its equivalence assessments by the end of June.  The Commission will continue the assessments based on further replies that it is currently receiving. The assessments may lead, in each of the areas, to decisions on equivalence or to no equivalence. The Commission will take decisions based on a comprehensive assessment, including of the EU interest.

In a number of areas, the Commission has not initiated an assessment, either because equivalence decisions have already been granted[3] or because, for instance, the EU legal framework is not yet fully in place. With regard to the latter areas[4], the Commission will not adopt an equivalence decision in the short or medium term.

On the basis of an analysis conducted with the European Central Bank, the Single Resolution Board and the European Supervisory Authorities, and of the preparation undertaken by financial services firms, the Commission has identified only one area which may present financial stability risks, namely the central clearing counterparties (CCPs) of derivatives. Therefore, in the short term and in order to address the possible risks to financial stability, the

[1] See Part IV on ‘Financial Services’ of the Revised text of the Political Declaration setting out the framework for the future relationship between the European Union and the United Kingdom as agreed at negotiators’ level on 17 October 2019, OJ C34, 31 January 2020, 1-16.

[2] COM (2019) 349 final. Communication from the Commission, Equivalence in the area of financial services

[3] Areas already granted:

- Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories (EMIR), as amended; Art. 1(6) - Exemption central banks and public bodies

- Regulation (EU)2015/2365 on transparency of securities financing transactions and of reuse (SFTR); Art. 2(4) - Central bank exemption

- Regulation (EU) N° 600/2014 on markets in financial instruments (MIFIR); Art. 1(9) - Central bank exemption

- Regulation (EU) No 596/2014 on insider dealing and market manipulation (MAR Market Abuse Regulation); Art .6(5) - Exemption central banks and public bodies

[4] - Directive 2004/109/EC - Transparency Directive - Accounting Standards; Art. 23(4)[first subparagraph, point (ii)] - General transparency requirements

- Directive 2006/43/EC on statutory audits of annual accounts and consolidated accounts (Statutory Audit); Art. 45(6) - Equivalence to the international auditing standards of the standards and requirements in the third country

- Regulation (EU) N° 600/2014 on markets in financial instruments (MIFIR); Art. 33(2) - Derivatives: trade execution and clearing obligations; Art. 38(3) - Access for third-country trading venues and CCPs; Art. 47(1) - Investment firms providing investment services to EU professional clients and eligible counterparties

– Directive 2014/65 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (MiFID 2 – recast; Art. 25(4)[a] - Regulated markets for the purposes of easier distribution in the EU of certain financial instruments

– Regulation (EU) No 596/2014 on insider dealing and market manipulation (MAR Market Abuse Regulation); Art. 6(6) - Exemption for climate policy activities

– Regulation (EU) No 236/2012 on short selling and certain aspects of Credit Default Swaps (SSR);

Art. 17(2) - Exemption for market making activities

– Regulation (EU)2017/1129 of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/EC; Art. 29(3) - Prospectus rules

Commission is considering the adoption of a time-limited equivalence decision for the United Kingdom in this area.

Such a time-limited decision would allow EU-based CCPs to develop further their capacity to clear relevant trades in the short and medium term and EU clearing members to take and implement the necessary steps, including by reducing their systemic exposure to UK market infrastructures.

In order to enhance the supervision and regulation of clearing activities that are of systemic importance for the Union, the EU is currently implementing the EMIR 2.2 Regulation. The Commission is adopting the implementing measures that will determine the degree of systemic risk of third-country CCPs and the necessary measures to strengthen the supervision of such CCPs, as well as the possible need for further measures to mitigate those risks.

Advice to businesses and Member State administrations

Insurance operators, banks, investment firms, trading venues and other financial services providers should finalise and implement their preparatory measures by 31 December 2020 at the latest to be ready for the changes that will happen under all scenarios, including wherein their area, there is no equivalence decision taken by the European Union or the United Kingdom.

Union businesses, banks or investors that currently rely on UK service providers should consider how this may affect their operations and take all the necessary steps to prepare for all possible scenarios. EU financial services providers with operations in the United Kingdom should also prepare to abide by all relevant UK rules. EU clearing members of UK CCPs and their clients should take active steps to prepare for all scenarios, including by reducing their systemic exposure to UK market infrastructures.

EU and national supervisors and regulators will need to continue their dialogue with stakeholders with a view to ensuring that all necessary actions for readiness are taken by the end of 2020.

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