As the Cabinet, Government and City explore the options for what a post-Brexit UK/EU deal might look like, all manner of options have been raised. If the UK does not remain a member of the EU single market, the extent to which it is able to secure trading rights for financial services broadly similar to the existing EU passporting rights will be critical for the future of the City.
Much consideration has been given to the political constraints on the UK government, with so-called “red lines” around the free movement of people and being bound by EU law. However, the EU might also be constrained in what it can and cannot offer.
If the EU were to agree to allow the UK to stay outside the single market but reach a bespoke deal allowing UK-based financial services firms to use passporting rights, it might be required to offer the same treatment to Canadian firms.
Under the Comprehensive Economic and Trade Agreement (CETA), which was recently concluded between the EU and Canada (although not yet in force), Canadian firms can provide limited cross-border services to EU customers in relation to a small category of products, such as marine insurance and portfolio management services. However, crucially, this section of the CETA contains a “most favoured nation” or “MFN” clause, which provides that (subject to some limited exemptions), if the EU grants better treatment to another country, such as the UK, it will then grant equivalent treatment to Canada.
Put another way, in order to avoid having to offer the same treatment to Canada, the EU would need to ensure that a bespoke deal with the UK falls within one of the exemptions to the MFN clause. That may, however, be easier said than done. Only the following types of deal would not need to be offered to Canada:
- A deal that creates an “internal market” between the EU and UK (but this, importantly, must cover the free movement of services, capital and persons – something which is unlikely to be politically acceptable to the UK);
- One that grants the right of establishment (i.e. the right to set up and operate branches under the same conditions as apply to firms incorporated under the national law of the relevant member state). Whilst such a deal is unlikely to be particularly controversial, it is unlikely that this exemption would extend to the cross-border supply of services, which go beyond the right of establishment; or
- One in which the UK and EU approximate their legislation, either through the UK agreeing to abide by EU laws or through the adoption of common legislation (in respect of which the former is unlikely to appeal to the UK and the latter is unlikely to be acceptable to the EU).
- Unless the UK’s deal with the EU can fit within one of these exemptions, the EU’s trade negotiators will have their hands tied. Having taken seven years to reach an agreement with Canada, it can reasonably be presumed that the EU will not be willing to extend access to its financial services market to Canada simply through the operation of the MFN clause.
In summary, when considering the shape of the UK’s future EU deal on financial services, we should not assume that the EU has carte blanche to agree to whatever the UK wants. Its hands will be tied by CETA. Even if the UK and EU reach a meeting of minds on this subject (which again, should by no means be assumed), CETA could place severe limitations on the kind of deal that the UK might be able to achieve.