The United Kingdom’s departure from the European Union marked the end of passporting rights for financial services firms, introducing a complex regulatory environment that demanded immediate adjustments. This article explores the state of play today versus the transitional arrangements that defined the years immediately following Brexit, focusing on UK firms operating in the EU and vice versa.
When the Brexit transition period ended on December 31, 2020, UK-based firms faced the loss of their ability to provide financial services across the European Economic Area (EEA) without obtaining additional authorizations. Conversely, EU-based firms required new permissions to continue serving clients in the UK. Temporary Permission Regimes (TPRs) were introduced to mitigate disruption, allowing firms to continue operations while seeking permanent solutions.
In the UK, the Financial Conduct Authority (FCA) introduced a TPR for EEA firms, offering continuity during the authorization process. On the EU side, approaches varied significantly by jurisdiction. For example:
- Belgium allowed UK firms to provide investment services to professional clients under transitional arrangements.
- France created temporary frameworks for specific sectors, such as private equity and insurance-linked savings plans.
- Denmark issued Section 33 Licenses, permitting UK firms to serve professional clients until broader equivalence decisions were made.
These transitional measures reflected the fragmented approach within the EU and highlighted the lack of an overarching equivalence agreement.
From Transitional to Permanent Solutions
Five years later, the temporary solutions of the immediate post-Brexit years have largely been replaced by permanent regulatory frameworks. UK firms that wish to maintain access to the EU have been compelled to establish subsidiaries or branches within the EU. This has involved obtaining regulatory permissions from local authorities, aligning with domestic rules, and, in some cases, restructuring business operations.
For EU firms seeking to operate in the UK, the TPR has transitioned into a more permanent regime, with many firms now fully authorized by the FCA. The UK’s regulatory framework has remained stable, providing certainty for firms seeking market access. This is evidenced through the various regulatory updates and the introduction of additional regimes, such as the Overseas Fund Regime (OFR) (introduced in 2021) enabling the marketing of overseas collective investment schemes to UK investors in a streamlined manner, provided those schemes meet equivalent standards.
The Role of Equivalence and Bilateral Agreements
The concept of equivalence—whereby the EU grants market access to non-EU countries whose regulatory standards are deemed comparable—has played a limited role in the UK-EU financial services relationship. While the EU has recognized the UK’s regulatory regime as equivalent in certain areas, such as central clearing, it has withheld broader equivalence decisions for investment services, creating significant barriers for UK firms.
In an attempt to mitigate these challenges, the UK has pursued bilateral agreements outside the EU. Notably, the Berne Financial Services Agreement with Switzerland enhances cross-border trade in financial services by aligning regulatory standards. The UK has also signed trade agreements with non-EU countries, seeking to replicate or improve upon pre-Brexit arrangements.
A Pragmatic Approach to Maintaining Connectivity
Despite the challenges of post-Brexit regulatory fragmentation, firms like Laven have provided essential support to businesses navigating this new environment. Whilst our access to the EU is now limited, by leveraging a robust network and deep regulatory expertise, Laven has facilitated access points for firms operating across jurisdictions, ensuring compliance with local regulations while maintaining operational efficiency. The regulatory landscape five years after Brexit reflects a transition from reliance on what appeared to be optimistic temporary measures to the establishment of permanent frameworks that leave much uncertainty, impose restrictions on market access, and lack clarity on how they can be navigated. Many firms conducting simple activities have been caught out by these rules, facing disproportionate compliance burdens. This lack of proportionality underscores the need for UK and EU regulators to revisit and refine these frameworks.
