The UK-EU Memorandum of Understanding (MOU)

What is the MOU?

On 26 March 2021 the technical negotiations concluded on the MOU for financial services between the UK and the EU.  While the MOU is still subject to political approval and the final text not yet public, we understand that there are now unlikely to be any further changes. In this note, we set out the MOU’s expected content and what we can reasonably hope to see as the MOU is approved in the UK and the EU.

Our comments are based on our understanding of the areas of discussion and should not be relied upon without verifying the final details of the MOU, once it is publicly available.

Headlines

In this article we discuss what we anticipate will be in the text of the financial services industry MOU concluded at the end of March but which has yet to be published.

• We expect to see provisions on
• The ‘Joint UK-EU Financial Regulatory Forum’ including greater transparency on legal and regulatory developments
• Compatibility and equivalence processes
• Mechanisms for bilateral discussions
• Greater co-operation and co-ordination between the parties’ national bodies
• Greater co-operation and co-ordination in respect of international fora

Below we discuss these areas in more detail.

What is the purpose of the MOU?

The UK and the EU have agreed that they have a joint objective to pursue a relationship based on ‘robust and ambitious’ bilateral regulatory cooperation.

This is intended to reflect the breadth and depth of financial services activity between the UK and the EU with a shared focus of maintaining ‘financial stability, market integrity, and the protection of investors and consumers’, and as was referenced in the Joint Declaration attached to the Trade and Cooperation Agreement concluded in December 2020.

What is the scope of the MOU?

As we say above, the text of the MOU is not yet publicly available.  Based on our understanding of the discussions to date, the MOU will likely provide primarily for the bilateral exchange of views and analysis relating to regulatory developments and issues of common interest.

Set out below are our current thoughts on the likely scope of the MOU.

A key objective of the MOU is to establish the mechanism for a regulatory dialogue between the UK and the EU which will be known as the ‘Joint UK-EU Financial Regulatory Forum’. The two sides will be represented by UK HM Treasury and DG FISMA for the EU. 

The first meeting is expected to be between Commissioner McGuinness and Chancellor Sunak and it is anticipated that this will be before the summer. It is believed that meetings of the Forum will be held ‘at least semi- annually’ and that they will be underpinned by several ‘intercessional meetings’. 

The latter will be at the working level and follow an agreed annual work programme. It is thought that the MOU will also contain provisions in relation to the Forum concerning the Member States’ inclusion and ‘technical experts as required’ in the preparation, conduct, and debrief of these meetings.

We anticipate that reference will also be made to the main objectives each side hopes to achieve through the Forum.  We believe that this will include improving the level of transparency about legislative and regulatory plans, reducing uncertainty in the interests of market participants about access to each other’s markets and the identification of cross-border implementation issues.

It is also thought that the MOU may potentially consider the ‘compatibility’ of each other’s regimes. It should be noted that this would reflect a change of emphasis in the UK Government’s approach to equivalence and alignment.  As a result, it is most likely, in our view, that references to any alignment of regulations will now, perhaps more realistically, be caveated with the expression ‘where appropriate’.

From a UK perspective…we understand that officials expect the above approach to be a useful way to explain the legislative priorities across various financial services arenas.  It is also understood that the UK believes that this approach is the most likely to enable it to maintain some degree of influence over the EU’s thinking as it goes into the second half of 2021 where there is a full agenda of reviews for AIFMD/UCITS, ELTIF, and MiFID/R.

From an EU perspective…we understand that the MOU and in particular discussions through the Forum will enable the EU to let the UK know of areas where the EU sees as any significant divergence away from the EU’s own regulatory regime.  We believe that the EU will also use the process as means of reminding the UK that the EU itself will retain full autonomy over its legislative agenda.

A second objective of the MOU, but of equally high importance… is that it should improve transparency and permit processes to be developed to create an environment for an appropriate dialogue about the adoption, suspension, and withdrawal of equivalence determinations. 

In this regard, in addition to establishing the Forum, we understand that the parties have agreed to increase the level of ‘transparency and dialogue concerning the adoption, suspension and withdrawal of equivalence determinations’.

If this view is correct it could be a significant concession for the UK as, while the EU maintains such a provision can never prevent it from acting unilaterally, the UK side will view this as essential in order to achieve positive equivalence determinations from the EU later this year.

In this area, we believe that it is likely that the MOU will formally encouraging the exchange of views on ‘deference regimes, such as equivalence, and other tools’, along with requirements for the two sides to compare ‘risk analysis and economic impact assessments’ where this may impact on ‘market inter-connectedness’.

However, despite this apparent improvement in the position on equivalence, we understand that any such process will still be subject to the parties’ own independent and autonomous decision-making processes and protocols.  For the EU this will include agreement needed from the 27 Member States.

A third area that we think will be covered in the MOU, flowing from the areas discussed above…will be the capability for the exchange of bilateral views and, where appropriate, sharing analysis relating to market developments and financial stability issues.

We think that, beyond the likely commitment to discuss each party’s own agendas for change in legislation or regulation, the MOU will also provide channels for co-operation on issues of ‘mutual interest’.  This would enable the parties to have a means for discussing issues such as those which arose in the 2008/9 financial crisis or the COVID-19 2020 turmoil.

We base our thinking on this on the elements already included in the MOU signed between the Financial Conduct Authority, ESMA, and Member States in February 2019.  However, while the 2019 MOU enabled the exchange of information about market participants, transaction data, and close co-operation amongst authorities at the working level in the interests of financial stability, it was at a relatively high level and did not include some of the mechanisms we believe will now be formalised.

The fourth area that we hope will be covered…will be enhanced co-operation and co-ordination particularly between the parties’ various regulatory, technical and enforcement bodies most of which were previously referred to as ‘national competent authorities’.

Lastly, we understand from those close to the discussions, that the two sides have agreed to enhance their international co-operation. We think that this is not an unlikely outcome particularly in respect of the G20 and IOSCO.  

Of course, it is probable that any co-operation will be ‘where practical’.  The parties have historically shared their views on agenda items ahead of key G20 and other international meetings and we do not see why this would not continue.  We therefore believe that the parties will be willing to keep each other informed of how international standards agreed at such meetings are being adopted at a national level and be prepared to support each other ‘where practical’ in resisting what they perceive to be inappropriate or unworkable solutions.

What does this mean for you?

• We do not believe that the final text of the MOU is likely to change over the course of the approval process.
• Achieving the end of March 2021 deadline shows a strong willingness of the parties to co-operate which bodes well particularly in view of recent public “spats”.
• We do expect the Commission to maintain its hardline stance concerning equivalence, at least in the short-term.
• A more positive note is that the parties will soon have a formal mechanism to raise and discuss their different approaches.
• The MOU is not likely to lead to substantive change in the short to medium term for UK firms operating cross-border into the EU.

How can Merlys Help?

• We have over 50 years of advising firms who want to conduct cross-border financial services whether into or out of the EU.
• We are experts in explaining the impacts of legislation on particular businesses and on advising what steps need to be undertaken for compliance, whether at an organisation, product/ mandate or documentation level.
• We can carry out regulatory and product “audits” to reassure you and your staff.
• We can assist you in setting up new businesses in other jurisdictions if you feel that operating cross-border is not your preferred model.

To discuss any aspect arising from this article and for advice or support  call us as below…

Verena Charvet MBA,
Managing Director at Merlys Consulting

Connect:  https://www.linkedin.com/in/verenacharvet/

Email: verena.charvet@merlys.uk

Contact/Call us at Merlys | +44 (0)20 7821 0191

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This briefing note is intended to act as general guidance. Merlys is happy to assist with any aspect of the content in this article, as it relates to your business.