Brexit: Where next for financial services occupiers?

The Brexit deal has been done since my previous blog about Brexit’s implications for the UK financial services industry. So, where next?

An annex to the Brexit deal recognises that the existing ‘equivalence’ framework for mutual regulation of financial services regulation is not likely to be adequate, given the existing high level of EU-UK financial services integration. For example, as things stand, equivalence can be withdrawn with just 30 days’ notice. So a more ‘durable and stable’ regime of ‘structured regulatory cooperation’ is proposed. 

Reassuringly, it has been agreed that this new regime will include proposals for ‘dialogue’ (ie, negotiation) before the withdrawal or suspension of any equivalence regime on either side. The Brexit deal also prevents the EU from using the withdrawal of equivalence as a retaliatory tool when other unrelated matters are in dispute, the tactic the EU are using on the Swiss. So, for example, financial services is insulated from a UK-EU dispute on unfair competition or state aid.

The initial agreement (MOU) on this framework is supposed to be in place by March 2021, alongside equivalence decisions for individual financial services sectors, which has moved much faster on the UK side than on the EU side.

As things stand, EU financial services businesses selling into the UK can rely on the UK’s unilateral equivalence decision. But (according to the UK Investment Association) UK financial services businesses selling into the EU will either have to trade through an EU-based subsidiary or “utilise the patchwork of national exemptions and license arrangements to continue servicing European clients until at least June 2021”.

This position is hardly satisfactory, and after nearly five years of debate, the cooperation framework may arrive simply too late for some UK-based financial services firms. And EU equivalence may never be granted at all for some sectors.

On the other hand, every loss probably some mitigating gain: for example, the UK’s loss of trading in around €6.5bn of EU shares daily has been well publicised; but this is offset to some extent by the UK now being able to trade in €1.3bn Swiss shares, which EU financial centres can’t.

What does it all mean for real estate? The evidence so far is that financial services occupiers have generally adopted a ‘wait and see’ approach to moving out of the UK during the Brexit negotiations: only when the muddy waters have cleared, and the specific implications for their own business have become reasonably clear, have they made their decision to stay or go. And the scale of movement out of the UK has been a lot smaller than some early prognoses had suggested. The ‘wait and see’ policy looks likely to continue as long as there’s a chance of a stable agreement (which there is).

In any case, Brexit should be into perspective in office leasing decisions. COVID-19 could have much bigger consequences for the entire office sector; but even setting that aside, Brexit has hardly been the only factor that office occupiers considered when making a relocation decision.