Last week Michael Gove gave evidence to the House of Lords European Union Select Committee on the second round of negotiations which took place last month. He said that the Government believes there is no need for an extension to the transition period and businesses will still be able to prepare in time, even with the ongoing Covid-19 crisis. In fact, he went so far as to say that even if the EU said it would ‘dearly love an extension’, he could not imagine saying anything other than ‘no’.
Mr Gove shrugged off Michel Barnier’s claims that the UK has refused to engage seriously on several fundamental issues. He said “the negotiations started cordially, and ended with goodwill, but there were one or two tough moments along the way”. He explained that the EU is very keen to have an ‘association agreement style approach’, similar to that with accession countries such as the Ukraine. The UK has argued that it would be better to have a series of discrete agreements i.e. a free trade agreement and separate approaches on fisheries and security. He pointed out that the UK is not seeking a variety of bespoke arrangements but rather a set of off the peg agreements based on precedent and therefore “the barrier, if there is any to agreement, is political rather than technical in most cases.”
On financial services, Mr Gove said that there is no reason why the EU could not conclude equivalence assessments and deem the UK equivalent by the end of June. This is because equivalence is primarily a rules-based rather than a discretion-based process of determining whether or not we comply with certain criteria and so it should be ‘reasonably straightforward’. Apparently, there is no sign yet that the EU is looking to trade off equivalence with other issues, such as fisheries. In Mr Gove’s view, failure to grant equivalence would be an ‘own goal’ for the EU. He acknowledged that the effect on the UK financial services sector would be ‘sub-optimal’, but thought the EU would face a bigger cost because our financial services sector is not only one of the best and most effectively regulated in the world, it is also one of the most efficient.
When asked about the possibility of the EU withdrawing equivalence on 30 days’ notice, he said that he would like it to be the case that the EU would not “promiscuously and whimsically withdraw equivalence given the UK has some of the highest, if not the highest, standards of financial services regulation”. Unfortunately, high standards of regulation have not prevented the EU from withdrawing equivalence in the past – the decision to withdraw equivalence in respect of Swiss financial markets rules in 2019 being a very recent example. However, if it were to happen to the UK, Mr Gove considers that a ‘fleet of foot City of London’ could always find ways of mitigating the effects. The City of London has a ‘unique alchemy’ which depends on the skills of the individuals there, the depth of the capital market and the support of the other business services that work alongside financial services. Perhaps more substantively, Mr Gove promised to return to the Committee with details of how the EU has responded to the UK’s demands for a structured process for withdrawal of equivalence decisions, including what is termed ‘appropriate consultation’.
Meanwhile, on 30 April, the PRA & FCA confirmed that they intend to use the Temporary Transitional Power and grant transitional relief from the end of the transition period (currently 31 December 2020) until 31 March 2022. This mirrors the general ‘standstill’ that was proposed in February 2019 for a hard Brexit and means that, for most requirements, firms will not need to comply with changes to their regulatory obligations resulting from Brexit onshored legislation from 1 January 2021. Instead, they will generally be able to continue to comply with the requirements as they had effect before that date. There are specific areas where the FCA and PRA will not grant transitional relief (e.g. MiFID II transaction reporting, EMIR reporting obligations, issuer rules, contractual recognition of bail-in, short-selling obligations, use of credit ratings and securitisation). In these areas, regulators will expect firms to take reasonable steps to comply with the changes to their regulatory obligations by the end of the transition period. The FCA has said that it is conscious of the scale, complexity and magnitude of some of these changes and consequently intends to act proportionately. The PRA has said that firms should, in substance, continue to do the same thing after exit as before, but to achieve this, they should take a common sense approach to interpreting pre-exit regulatory requirements.
While the UK has put in place transitional regimes for EEA firms, the situation for UK firms in the EU is not the same. The ability of UK firms to do business in the EU after the end of the transition period will therefore depend on the regulatory regimes of the individual EU member states. While many member states had put in place temporary transitional regimes in the event of a ‘no-deal’, the majority of these have now lapsed. Firms must continue to determine what action they need to take to be ready for the end of the transition period.
We wait to see what the third round of negotiations with the EU will bring. In Mr Gove’s words, “the proof of the pudding is in the talking”. In the meantime, his message is clear. There will be no extension to the transition period and firms must do all they can to prepare for 31 December 2020.