Services and investment
The UK is world leading in many services sectors, including legal, business and financial services. In 2017, services made up 79 percent of total UK GVA worth £1.46 trillion.10 In 2017, 21 percent of EU27 services imports came from the UK, and 20 percent of EU27 services exports went to the UK.11 Globally services trade is growing rapidly; UK services trade with non-EU countries grew by 73 percent between 2007 and 2017.12
The UK is proposing new arrangements for services and digital that would provide regulatory flexibility, which is important for the UK’s services-based economy. This means that the UK and the EU will not have current levels of access to each other’s markets.
The UK’s proposal builds on the principles of international trade and the precedents of existing EU trade agreements and reflects its unique starting point. It would include:
- general provisions that minimise the introduction of discriminatory and non-discriminatory barriers to the establishment, investment and the cross-border provision of services, with barriers only permitted where that is agreed upfront;
- a system for the mutual recognition of professional qualifications, enabling professionals to provide services across the UK and EU;
- additional, mutually beneficial arrangements for professional and business services; and
- a new economic and regulatory arrangement for financial services.
The WTO’s General Agreement on Trade in Services (GATS) provides a framework for global services trade and defines four modes of services supply:
- a service crossing a border (for example, a service being provided over the
- a consumer of a service crossing a border (for example, tourism);
- a service provider establishing a legal presence across a border (for example, a retail chain opening a new establishment in another country); and
- a service provider crossing a border to a consumer (for example, a lawyer going to another country to provide legal advice to a client).
Under GATS, FTAs are obliged to cover all modes of services supply and to have substantial sectoral coverage. But each new FTA is unique to the parties involved, giving service providers different market access rights. Over time FTAs have promoted a more liberalising approach to services trade.
The UK proposes arrangements with broad coverage, ensuring that service suppliers and investors are allowed to operate in a broad number of sectors without encountering unjustified barriers or discrimination unless otherwise agreed.
Specifically, the UK is seeking:
- broad coverage across services sectors and the modes of supply, in line with GATS obligations;
- deep Market Access commitments, eliminating, among other things, explicit restrictions on the number of services providers from one country that can operate in another;
- deep commitments on National Treatment, to guarantee that foreign service providers are treated the same as equivalent local providers, with any exceptions, kept to a minimum;
- provisions to ensure the free and timely flow of financial capital for day-to-day business needs, including payments and transfers; and
- best-in-class arrangements on domestic regulation, which ensure that all new regulation is necessary and proportionate.
Mutual recognition of professional qualifications
The EU regime for the recognition of professional qualifications enables UK and EU professionals to practise across both the UK and the EU on a temporary, longer-term or permanent basis, without fully having to retrain or requalify. Since 1997 the UK has recognised over 142,000 EU qualifications, including for lawyers, social workers, and engineers.13 Over 27,000 decisions to recognise UK qualifications have been undertaken in the EU.
The UK agrees with the position set out in the European Council’s March 2018 Guidelines, which stated that the future partnership should include ambitious provisions on the recognition of professional qualifications. This is particularly relevant for the healthcare, education and veterinary/agri-food sectors in the context of North-South cooperation between Northern Ireland and Ireland.
The UK’s arrangements with the EU should not be constrained by existing EU FTA precedents. CETA includes some of the EU’s most ambitious third country arrangements on the mutual recognition of professional qualifications. Yet CETA only sets a framework within which regulators may negotiate recognition agreements for professional qualifications; it does not itself provide for mutual recognition. The UK proposes establishing a system that:
- is broad in scope, covering the same range of professions as the Mutual Recognition of Qualifications Directive;
- includes those operating either on a permanent or temporary basis across
- is predictable and proportionate, enabling professionals to demonstrate that they meet the necessary requirements, or to undertake legitimate compensatory measures where there is a significant difference between qualifications or training, in a timely way; and
- provides transparency, with cooperation between regulators to facilitate the exchange of information about breaches of professional standards, and to review changes to professional qualifications over time.
Professional and business services
In addition to the general services provisions, the UK proposes supplementary provisions for professional and business services, for example, permitting joint practice between UK and EU lawyers, and continued joint UK-EU ownership of accounting firms. The supplementary provisions would not replicate Single Market membership, and professional and business service providers would have rights in the UK and the EU which differ from current arrangements.
The UK and EU financial services markets are highly interconnected: UK-located banks underwrite around half of the debt and equity issued by EU businesses; UK-located banks are counterparty to over half of the over-the-counter interest rate derivatives traded by EU companies and banks;around £1.4 trillion of assets are managed in the UK on behalf of European clients;the world-leading London Market for insurance hosts all of the world’s twenty largest international (re)insurance companies; and more international banking activity is booked in the UK than in any other country.
This interconnected market has benefits for consumers and businesses across Europe. For example, one study has found that if new regulatory barriers forced the fragmentation of firms’ balance sheets, the wholesale banking industry would need to find £23-38 billion of extra capital.These are costs that would ultimately be borne by consumers and businesses.
This interconnectedness also highlights the UK’s and the EU’s shared interest in financial stability. The UK is host to all 30 global systemically important banks and is the home regulator for four of them. Given its scale, the International Monetary Fund (IMF) has described financial stability in the UK as a “global public good”.
Alongside its European partners, the UK has developed an institutional framework to manage financial stability while ensuring the regulatory system supports a global financial centre.
As the UK leaves the EU and the Single Market, it recognises the need for a new and fair balance of rights and responsibilities. The UK can no longer operate under the EU’s “passporting” regime, as this is intrinsic to the Single Market of which it will no longer be a member.
In addition, given the importance of financial services to financial stability, both the UK and the EU will wish to maintain the autonomy of decision-making and the ability to legislate for their own interests. For example, in some cases, the UK will need to be able to impose higher than global standards to manage its financial stability exposure. In other areas, the UK market contains products and business models that are different from those found elsewhere in the EU, and regulation would need to reflect these differences.
The decision on whether and on what terms the UK should have access to the EU’s markets will be a matter for the EU, and vice versa. However, a coordinated approach leading to compatible regulation is also essential for promoting financial stability and avoiding regulatory arbitrage.
The EU has third country equivalence regimes which provide limited access for some of its third country partners to some areas of EU financial services markets. These regimes are not sufficient to deal with a third country whose financial markets are as deeply interconnected with the EU’s as those of the UK are. In particular, the existing regimes do not provide for:
- institutional dialogue, meaning there is no bilateral mechanism for the EU and the third country to discuss changes to their rules on financial services in order to maximise the chance of maintaining compatible rules and to minimise the risks of regulatory arbitrage or threats to financial stability;
- a mediated solution where equivalence is threatened by a divergence of rules or supervisory practices;
- sufficient tools for reciprocal supervisory cooperation, information sharing, crisis procedures, or the supervision of cross-border financial market infrastructure;
- some services, where clients in the UK and the EU currently benefit from integrated markets and cross-border business models. This would lead to unnecessary fragmentation of markets and increased costs to consumers and businesses; or
- phased adjustments and careful management of the impacts of change, so that businesses face a predictable environment.
In this context, the UK proposes a new economic and regulatory arrangement with the EU in financial services. This would maintain the economic benefits of cross-border provision of the most important international financial services traded between the UK and the EU – those that generate the greatest economies of scale and scope – while preserving regulatory and supervisory cooperation, and maintaining financial stability, market integrity and consumer protection.
This new economic and regulatory arrangement would be based on the principle of autonomy for each party over decisions regarding access to its market, with a bilateral framework of treaty-based commitments to underpin the operation of the relationship, ensure transparency and stability, and promote cooperation.
Such an arrangement would respect the regulatory autonomy of both parties while ensuring decisions made by either party are implemented in line with agreed processes, and that provision is made for necessary consultation and collaboration between the parties.
As part of this, the existing autonomous frameworks for equivalence would need to be expanded, to reflect the fact that equivalence, as it exists today, is not sufficient in scope for the breadth of the interconnectedness of UK-EU financial services provision. A new arrangement would need to encompass a broader range of cross-border activities that reflect global financial business models and the high degree of economic integration. The UK recognises, however, that this arrangement cannot replicate the EU’s passporting regime.
As the UK and the EU start from a position of identical rules and entwined supervisory frameworks, the UK proposes that there should be reciprocal recognition of equivalence under all existing third country regimes, taking effect at the end of the implementation period. This reflects the reality that all relevant criteria, including continued supervisory cooperation, can readily be satisfied by both the UK and the EU. It would also provide initial confidence in the system to firms and markets.
Although future determinations of equivalence would be an autonomous matter for each party, the new arrangement should include provisions through the bilateral arrangement for:
- common principles for the governance of the relationship;
- extensive supervisory cooperation and regulatory dialogue; and
- predictable, transparent and robust processes.
Common principles for the governance of the relationship
As established in many existing EU provisions, this approach would be based on an evidence-based judgement of the equivalence of outcomes achieved by the respective regulatory and supervisory regimes. The UK and the EU would set out a shared intention to avoid adopting regulations that produce divergent outcomes in relation to cross-border financial services.
In practice, as the UK and the EU have since the financial crisis, the UK will continue to be active in shaping international rules and will continue to uphold global norms. To reflect this, the UK-EU arrangement should include common objectives, such as maintaining economic relations of broad scope, preserving regulatory compatibility, and supporting collaboration – bilaterally and in multilateral fora – to manage shared interests such as financial stability and the prevention of regulatory arbitrage.
Extensive supervisory cooperation and regulatory dialogue
The UK proposes that the UK and the EU would commit to an overall framework that supports extensive collaboration and dialogue.
- Regulatory dialogue: for equivalence to be maintained over the long term, the UK and the EU should be able to understand and comment on each other’s proposals at an early stage through a structured consultative process of dialogue at the political and technical level while respecting the autonomy of each side’s legislative process and decision-making.
- Supervisory cooperation: in a close economic relationship between the UK and the EU financial services sectors, it would be necessary to ensure close supervisory cooperation in relation to firms which pose a systemic risk and/or that provide significant cross-border services on the basis of equivalence.
It will be essential for the UK and the EU to commit to reciprocal and close cooperation to protect consumers, financial stability and market integrity with codified procedures for routine cooperation and for coordination in crisis situations. This should include appropriate reciprocal participation in supervisory colleges, which are coordination structures that bring together regulatory authorities involved in the supervision of banks and other major financial institutions – as well as other supervisory structures, including information exchange, mechanisms for consultation over decisions affecting the other party, and arrangements for the supervision of market infrastructure.
Predictable, transparent and robust processes
To give business the certainty necessary to plan and invest, transparent processes would be needed to ensure the relationship is stable, reliable and enduring. The UK envisages that some of these processes would be bilaterally agreed and treaty-based; others would be achieved through the autonomous measures of the parties.
- Transparent assessment methodology: the process for assessing equivalence should be based on clear and common objectives; make use of consultation with industry and other stakeholders, and include the possibility of using expert panels.
- Structured withdrawal process: if circumstances arise that cause either party to wish to withdraw equivalence, there should be an initial period of consultation on possible solutions to maintain equivalence. Either party may also indicate to the other that it no longer seeks equivalence in a certain area. There should then be clear timelines and notice periods, which are appropriate for the scale of the change before it takes effect. There should also be a safeguard for acquired rights to avoid risks to financial stability, market integrity or consumer protection from sudden changes to the regulatory environment.
- Long-term stabilisation: in accordance with WTO principles, there should be a presumption against unilateral changes that narrow the terms of existing market access regimes, other than in exceptional circumstances. This would mean each side trying to avoid future changes that assess equivalence in entirely new ways that could destabilise an established relationship. Existing equivalence decisions should only lapse after a new decision has been taken.
Finally, where disputes arise between the UK and the EU on the binding treaty-based commitments, the institutional arrangements set out in further detail in other sections should apply.
This Article draws on the White Paper The Future Relationship between the United Kingdom and the European Union Presented to Parliament by the Prime Minister July 2018 Cm 9593. UK public sector information is reproduced pursuant to the Open Government Licence The Legal Materials contain UK public sector information licensed under the Open Government Licence v3.0. The Licence is available at http://www.nationalarchives.gov.uk/doc/open-government-licence/version/3/ (the UK Licence).
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