25 September, 2020

Financial services Brexit journey will continue until (at least) 2022

Things were not looking good for the post-Brexit financial services landscape as the 30 June 2020 negotiating deadline (by which everything was supposed to be sorted) came and went.

Both sides had agreed that they would work towards a so-called ‘equivalence’ regime to maximise the free flow of financial services after Brexit. Equivalence does not offer as much access (either way) as actually being in the EU, but it’s a lot better than nothing. It can be granted to any non-EU member. The process has allegedly been completed on the UK side – in other words, the UK Government had unilaterally decided by the deadline that EU financial services firms may continue to operate in the UK after 1 January 2021. But the EU has not yet completed its own reciprocal assessment, which is much more detailed.

As is so often the case with Brexit dossiers, it all turns out to be much more complicated and politically charged than anyone originally thought. The UK appears to have decided to grant access come what may, but accuses the EU of bringing its own equivalence assessment into the wider Brexit negotiation.

However, it may also just be a practical issue. For example, one of the 28 areas where equivalence is available relates to marketing of cross-border investment banking services. This is the biggest prize for the UK. In this area, the EU is in the middle of reforming its own rules, making UK equivalence more difficult to determine. The rules don’t come into force until mid 2021, which means that even if equivalence were determined earlier, UK firms might not know what it is they were being deemed to be equivalent with. This is a pretty good example of how Brexit is going to be a long and rather drawn out affair, with certainty for different sectors being achieved at different times.

Similarly, the EU has just announced that it is going to unilaterally allow EU firms to continue to access UK-based clearing houses for euro-denominated financial instruments until mid 2022 – mostly because there are not yet any other options. London’s clearing houses are dominant, and while they don’t use much real estate, this EU announcement gives them another reason not to reduce their office footprint just yet.

So, for many sub-sectors of financial services, 1 January 2021 is not quite the cliff edge that we thought it might be. It does look likely that an equivalence deal will be reached by then, but even when it is reached, this does not mean that firms are suddenly clear on the implications for real estate. The disentangling of UK and EU financial services is likely to take a lot longer. It will be piecemeal rather than a single blanket decision, and occupiers will have to make individual decisions depending on their actual (or anticipated) exposure to specific activities where access has or has not been granted. They will also have to manage the risk that the EU might punitively withdraw this access in the future, as it did recently for the Swiss.