After months of discussion on potential EU/UK access models for financial services, the launch of the Article 50 exit process on 29 March 2017 with Prime Minister May’s ‘Article 50 letter’ has cleared the way for the negotiations. Financial services are clearly a UK priority. The Article 50 letter specifically notes the need to cover financial services in a ‘bold and ambitious’ Free Trade Agreement. It also identifies the two issues which have dominated the financial services debate since the referendum: the need for the proposed new access arrangement to address EU/UK regulatory divergence (the letter refers to the ‘evolution’ of regulatory frameworks); and the need for dispute resolution mechanisms (a reference to the difficulties posed by the jurisdiction of the Court of Justice). Whether or not the negotiations will lead to a Free Trade Agreement which meets the UK’s objectives will be shaped by multiple and dynamic interests and preferences. Political preferences, at European Council and Member State level, will be key but those of the major EU institutions engaged should not be overlooked. This post comments on the EU institutional preferences and incentives which may shape the negotiations.
Protecting Single Market Technology
Current indications suggest a strong commitment to the single market in financial services; the single rulebook; and to the institutional governance arrangements of the European System of Financial Supervision. There is little evidence of an entrepreneurial push for deeper euro area financial governance following the departure of the UK, which has been the strongest advocate for multi-currency financial governance. Any such move could have generated tensions and led to a cleavage between Member States and institutions to the UK’s advantage. There is instead every indication of an EU concern to protect the governance technology which supports the single market in financial services and to make a clear distinction accordingly between single market ‘membership’ and ‘access’.
Prior to Brexit, the institutional tea-leaves could have been read as supporting the continued intensification of euro area financial governance, particularly as the Single Supervisory Mechanism became increasingly normalized within the Banking Union. The centralization of euro area markets governance had been mooted, including by the 2015 Five Presidents’ Report on Completing EMU. But institutional enthusiasm for grand designs in risk-sharing seems to be waning, at least for the short to medium term; progress on the proposed European Deposit Insurance Scheme and on the fiscal back-stop is slow. Risk reduction is the current focus of institutional attention, with the single rulebook its main vehicle. At the same time, there is some evidence of a concern, particularly in the European Parliament, to prevent the SSM from encroaching into single market governance.
Similarly, the major package of bank regulation reforms proposed by the Commission in November 2016, and the Commission’s related future reform agenda (following the 2015-2016 ‘stock take’ of EU financial regulation), suggest a strong commitment to the single rulebook; paraphrasing Prime Minister May’s 17 January 2017 speech on the UK’s negotiating objectives, the EU will ‘bend more sharply to uniformity’. The need for regulatory flexibility and calibration is increasingly being acknowledged, but EU-level proportionality mechanisms, directed to the specificities of firms and market segments, and not national options and derogations, appear to be the adjustment mechanism of choice.
In parallel, there appears to be new appetite for strengthening the European Supervisory Authorities (ESAs) which perform an array of quasi-regulatory and supervisory/coordination activities within the European System of Financial Supervision. The Commission’s 21 March 2017 consultation on the future of the ESAs is noticeably more sympathetic to the possibility of additional supervisory powers being conferred on the ESAs than the Commission has been in the past; its referencing of the potential need for supervisory changes following the UK withdrawal may be a straw in the wind indicating stronger single market institutional governance.
These recent indications suggest a commitment to protecting and enhancing the technology of single market financial governance, on which the EU has expended considerable political and institutional capital since the financial crisis. The bespoke equivalence/market access arrangements to be contained in a Free Trade Agreement, signalled in the Article 50 letter, would, however, operate outside the current third country/equivalence arrangements which are based on single market law and governance, including Court of Justice oversight. They could accordingly struggle – although there may be some wiggle room in the letter’s acknowledgement of the need to address dispute resolution and to manage regulatory evolution (which may be a nod towards shadowing the single rulebook). The draft Negotiation Guidelines issued by European Council President Donald Tusk on 31 March, however, do not suggest the EU will give way on Court of Justice oversight. There have also been some signals from the European Parliament, in the wake of the 29 March notification, that it would oppose any future agreement which contained piecemeal or sectoral provisions, including with respect to financial services, and that it sees the UK as falling under the third country regime provided for in EU legislation on withdrawal. The difficult negotiations on the Single Resolution Mechanism provide an earlier and cautionary tale: the European Parliament was fiercely opposed to an Intergovernmental Agreement, operating outside single market governance, governing the Mechanism’s funding.
The European Parliament will be a key player in the negotiations and, since the financial crisis era, has developed strong preferences and technical capacity on financial market governance. Prior to the Brexit referendum, it was becoming increasingly interested in the EU’s engagement with global financial governance, calling for greater oversight of how this was carried out - particularly of the Commission. It may not support bespoke EU/UK arrangements which lead to a significant empowerment of the Commission. It is also likely to have distinct views on the design of any new supervisory arrangements. One of the more intractable elements of any bespoke EU/UK deal on financial services is likely to be the organization of supervision. The EU will be concerned to ensure its interests (whether competitive, financial-stability-oriented, or otherwise) are protected in relation to the supervision of UK actors in the EU market. There is a spectrum of potential design options, from full-scale repatriation of activities to the EU (typically associated with euro-denominated clearing) to reliance on UK supervision. The Parliament has traditionally been a supporter of EU-level supervision through the ESAs and may require some form of EU-led supervision of UK firm activities in the EU.
The Commission can be expected to protect single market governance arrangements, notably the equivalence regime which governs third country access to the EU financial market. Its 27 February 2017 report on equivalence has a chilly tone, noting that equivalence arrangements are not a tool for trade liberalization but for protecting the stability of the EU market. The report does not suggest an appetite for major change to the current equivalence regime and contains two important signals which caution against predictions of new, liberal approaches to access, whether in a Free Trade Agreement or otherwise: the Commission seeks a more finely-tuned, proportionate, risk-based approach to equivalence, under which markets of more systemic relevance to the EU would receive more attention; and plans to engage in more monitoring of third country supervision.
Finally, the role of the ESAs should not be overlooked, given their technocratic capacity and growing influence. ESMA Chairman Maijoor recently warned of the potential risks to the EU from reliance on third country supervision and suggested (in the context of CCP access to the EU) that the EU ‘is an island of third country reliance,’ relying on third country supervision in a world in which cross-border access usually means that supervision in the relevant host market follows.
The attachment of the EU to the current single market governance arrangements can be expected to be a driver of its approach to the negotiations. This attachment cautions against predictions of radically different arrangements for EU/UK access to the current equivalence-based system, whether in a Free Trade Agreement or otherwise.
Niamh Moloney is Professor of Law at the London School of Economics and Political Science.
This post is part of the ‘Brexit Negotiations Series’, a series of posts based on contributions at the ‘Negotiating Brexit’ conference that took place in Oxford on 17 March 2017.
 The protection of single market governance arrangements from euro area caucusing and preferences was a major theme of the ‘New Settlement’ which David Cameron agreed with the European Council prior to the referendum: Decision of the Heads of State or Government Meeting Within the European Council, Concerning a New Settlement for the United Kingdom with the European Union, European Council Meeting, 18 and 19 February 2016.
 Completing Europe’s Economic and Monetary Union. Report by Jean-Claude Juncker, in close cooperation with Donald Tusk, Jerian Dijsselbloem, Mario Draghi and Martin Schulz, June 2015.
 Commission, Public Consultation on the Operations of the European Supervisory Authorities (2017).
 European Parliament, Motion for a Resolution to Wind Up the Debate on the Negotiations with the UK, 29 March 2017.
 European Parliament, Resolution of 12 April 2016 on the EU Role in the Framework of International, Financial, Monetary and Regulatory Institutions and Bodies.
 Commission, EU Equivalence Decisions in Financial Service Policy: an assessment (2017).
 Speech, ALDE Party Seminar on the Review of the ESAs, European Parliament, 8 February 2017.