EU/UK Announce Memorandum of Understanding – What does that mean for Financial Services Firms?

On 17th May 2023 the EU and UK finally announced the adoption of a draft Memorandum of Understanding (“MoU”) with respect to regulatory cooperation for financial services. The MoU professes to address the shared objectives of both the EU and UK in preserving financial stability, market integrity, and the protection of investors and consumers. The creation of the Windsor Framework resolving political issues pertaining to Northern Ireland ultimately made the MoU possible. The MoU has been designed to replicate the arrangements that are in place between the EU and other parts of the world – such as the USA.

Given financial services was left of out of the initial withdrawal agreement, having the MoU in place after years of fraught discussions and strained relations between the UK and the EU is a significant step. While the MoU does not grant the ideal scenario of “equivalence” between the UK and EU, nor does it improve (or reintroduce) cross border access to financial markets, it does establish a framework and environment, pitched at being robust and ambitious, for close cooperation between the different jurisdictions. It also signifies the change of tone in relations between the UK and EU in general. 

It is hoped, that by creating an ongoing forum for various regulatory bodies (such as HM Treasury, FCA, PRA et. al.) to engage in discussions with EU counterparts, issues such as regulatory divergence and potential regulatory arbitrage by market participants are avoided, thus simplifying or streamlining any regulatory change that financial services firms have to endure. This approach, in turn, creates a more stable overall regulatory framework globally, which would also seek to remove much of the uncertainty that has plagued the markets in recent times, which could result in benefits to investor returns. 

It is also crucial to note however that explicit wording is included referencing the ongoing ability of both sides to unilaterally implement regulatory or supervisory aspects that are deemed relevant to each side. This maintains the flexibility and independence that was championed by pro-leavers during, and after, the Brexit referendum. It also goes hand in hand with the Edinburgh Reforms, which were broadly reiterated in the FCA’s recent business plan under the guises of strengthening the UK’s position in global wholesale markets through the Future Regulatory Framework (“FRF”) and the review of the Asset Management sector.

Although the MoU is still subject to internal processes in the EU including endorsement by individual member states it is expected to be signed in relatively short order and the UK Government has confirmed that it “looks forward to holding the first meeting of the Forum which is created by the MoU as soon as possible.” So while little is known about the agenda for the first meeting, nor the process that will follow or what the future will look like if the Forum described in the MoU is successful then a path to ongoing cooperation may be possible. Though focused on the financial services sector, there is reference to wider geo-political aspects, such as the G20, and potential joint-declarations following Forum meetings. The multilateral and geo-political references point towards wider consideration rather than simply attempting to align views on AIFMD II which, if the trend continues, should see a more stable cross-channel relationship.

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