Memorandum of Understanding on Cooperation in Financial Services finally signed between the UK and EU – a substantive development or a symbolic gesture?

5 min read

On 27 June 2023, the UK signed a long-awaited Memorandum of Understanding ("MoU") with the European Union ("EU") to increase co-operation on financial services.1

The MoU has been a long time coming: regulatory cooperation was part of the UK's Brexit arrangement (under the Joint Declaration on Financial Services Regulatory Cooperation between the EU and UK of 24 December 2020) and technical negotiations on a draft were concluded by March 2021. Adoption has been delayed significantly since then, primarily due to disagreements between the EU and the UK regarding Northern Ireland (since ameliorated by the Windsor Framework).

The MoU does not represent an agreement or even a roadmap towards reconstituting any of the mutual freedoms enjoyed prior to Brexit; rather, it represents an arrangement to cooperate around shared objectives and establishes a 'Forum' mechanism to facilitate resumption of official market dialogue. It does at least represent an olive branch, signalling an intention to cooperate and ultimately to improve post-Brexit financial relations between the EU and the UK after a prolonged period of tension.

Market participants will no doubt view the MoU as a step in the right direction towards acknowledging the interconnectivity of the UK and EU financial markets, and the mutual advantages of increased cooperation and alignment. For those firms with businesses that straddle both the UK and the EU, hopes will rise of a forum capable of facilitating a more sympathetic approach to the challenges of operating common business and resource models across distinct regulatory systems. News of the MoU finally being signed has been widely welcomed by a range of industry bodies including UK Finance and the City of London.2

The MoU sets out a shared objective of preserving financial stability, market integrity and the protection of investors and consumers, which will be achieved by:

(i) bilateral exchanges of views and analysis relating to regulatory developments and other issues of common interest;

(ii) transparency and appropriate dialogue in the process of adoption, suspension and withdrawal of equivalence decisions;

(iii) bilateral exchanges of views and analysis relating to market developments and financial stability issues; and

(iv) enhanced cooperation and coordination including in international bodies as appropriate.

The bilateral exchanges and dialogue will predominantly take place in a twice-yearly forum, referred to as the Joint EU-UK Financial Regulatory Forum, with the first meeting due to take place in the autumn. The forum's general operational objectives are to:

(i) improve transparency;

(ii) reduce uncertainty;

(iii) identify potential cross-border implementation issues, including concerns linked to potential regulatory arbitrage by firms;

(iv) as appropriate, consider working towards compatibility of UK/EU standards;

(v) when relevant, promote domestic implementation consistent with international standards;

(vi) share knowledge to facilitate a common understanding of the EU and UK's regulatory frameworks; and

(vii) exchange information and views on other issues of common interest within the scope of these regulatory cooperation arrangements.

Importantly, the MoU explicitly states that the regulatory cooperation should not restrict the ability of either jurisdiction to implement regulatory, supervisory or other legal measures that it considers appropriate.

While the fact that cooperation has been restored is certainly a good news story, the reality is that it still leaves the UK/EU relationship a long way from where it was. For example, the UK/EU MoU bears comparison with the UK/Singapore MoU agreed in June 2021, where the UK has no recent history of specific integration with the Singapore market. Indeed, it could be said that the UK/Singapore MoU has a brighter tone, establishing a high-level framework for regulatory deference and giving a more proactive expression to the objectives of seeking areas of compatibility and consulting on regulatory initiatives. In contrast, the UK/EU MoU objective of "transparency and appropriate dialogue" in connection with equivalence decisions comes across as more wary. The UK/EU MoU also mirrors the existing relationship that the EU has with the US: the EU currently holds a Joint Regulatory Forum with the US to exchange views on topics of mutual interest as part of their regular bilateral regulatory cooperation.3

The UK/EU MoU arrives against the backdrop of the UK's Financial Services and Markets Bill ("FSM Bill"), which received Royal Assent on 29 June 2023. The FSM Bill aims to amend, repeal or replace most of retained EU law relating to financial services, thereby giving UK regulators increased responsibility. A European Parliament study in February 2023 remarked that "divergence of UK regulation from EU regulation is almost a given outcome following Brexit… in addition to such active divergence, there can also be passive divergence, with the UK not keeping up with EU legislative changes or not following new EU regulation in the financial services sector".4

With the Explanatory Notes to the FSM Bill remarking that the revocation process could take a number of years to achieve, it is not clear at this stage what degree of divergence could result. As the 4th Edition of Parliament's UK in a Changing Europe's regulatory divergence tracker noted in July 2022: "it could be that the ambition for light-touch regulation is, especially in the short term, undermined by the practical challenges of establishing new regulatory architecture."5 However, the will to initiate some divergence is already clear under the FSM Bill, and its devolution of rule-making powers to regulators enables adaptation outside a full legislative process. The newly established Joint EU-UK Financial Regulatory Forum may have a full workload ahead of it regarding the compatibility of UK/EU standards.


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