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The UK-EU trade deal and the end of the Brexit transitional period: things asset management firms should think about

  • United Kingdom
  • Brexit
  • Financial services and markets regulation
  • Financial services



Four and a half years after the UK voted to leave the EU, at 11:00p.m. on 31 December, the UK finally leaves the regulatory ambit of the EU at the end of the Brexit transitional period (otherwise known as the transitional or implementation period (“TIP”).  Big Ben will ring out for the UK’s departure as well as the New Year an hour later, providing two chances to celebrate or commiserate depending upon your view.

For financial services, this is a moment of significant change.  Although a UK-EU FTA (the Trade and Co-operation Agreement or TCA) has of course been agreed, it does not include any substantive provisions in respect of financial services.  From 1 January 2021, cross-border financial services trade between the UK and the EU will be governed by the UK and EU third country equivalence regimes embedded into their respective financial services regulations.  The UK has found the EU equivalent in respect of 28 such regimes.  The EU has found the UK temporarily equivalent in respect of only central counterparties (for 18 months) and central security depositories (for 6 months) and had said that there will be no extensions as it seeks to drive the relevant derivatives and custody business onshore to the EU.

The finalisation on 24 December, 2020 of the TCA itself was accompanied by a series of declarations, one of which relates to financial services, and by both EU Commission and UK Government commentary, and we turn in the next heading of this briefing to the latest position for financial services and equivalence. 

For the present, we remain of the view that the only sustainable approach to conducting financial services trade for asset managers across the UK-UE27 border after the end of the TIP is to set up a fully authorised branch or subsidiary in both the UK and the EU.  See our client briefings “Ten things for asset managers to note about the end of the transitional period” and “Ten further things for asset managers to note about the end of the transitional period”.

The end of the Brexit transitional period does therefore close one era of opportunity, but it also opens another.

While the fragmentation of the UK and EU27 financial services markets is an unwelcome development which risks a reduction of liquidity and breadth of services in the EU27 market, independence will open other possibilities for the UK.  The UK has already used its equivalence regimes to grant equivalence to various aspects of 33 countries’ financial services regimes, with more findings to follow.  The UK is also currently negotiating a financial services free trade and mutual recognition agreement with Switzerland which goes beyond what EU passporting offers.  Many parties, including Eversheds Sutherland, are working on proposals for an ambitious financial services agreement between the UK and the US.

The Chancellor, Rishi Sunak, has also put forward a number of key initiatives, including a new overseas fund regime, a new fund structure (the Long Term Asset Fund) and a new green plan, seeking, as he stated in an interview following the deal, to make the UK “the most competitive and dynamic place in the world to do business.”

The TCA and financial services  - prospects for equivalence

Upon the finalisation of the TCA on 24 December 2020 the Commission issued a set of Questions & Answers in relation to the Agreement that also commented more widely on financial services:

Does the Agreement cover financial services?

The draft EU-UK Trade and Cooperation Agreement covers financial services in the same way as they are generally covered in the EU's other FTAs with third countries.

In particular, the Agreement commits both parties to maintain their markets open for operators from the other Party seeking to supply services through establishment. The parties also commit to ensuring that internationally agreed standards in the financial services sector are implemented and applied in their territories. Both parties preserve their right to adopt or maintain measures for prudential reasons (‘prudential carve-out'), including in order to preserve financial stability and the integrity of financial markets. The parties will also aim to agree by March 2021 a Memorandum of Understanding establishing a framework for regulatory cooperation on financial services.

What about the equivalence decisions on financial services?

The Agreement does not include any elements pertaining to equivalence frameworks for financial services. These are unilateral decisions of each party and are not subject to negotiation.

The Commission has assessed the UK's replies to the Commission's equivalence questionnaires in 28 areas. A series of further clarifications will be needed, in particular regarding how the UK will diverge from EU frameworks after 31 December, how it will use its supervisory discretion regarding EU firms and how the UK's temporary regimes will affect EU firms. For these reasons, the Commission cannot finalise its assessment of the UK's equivalence in the 28 areas and therefore will not take decisions at this point in time. The assessments will continue. The Commission has taken note of the UK's equivalence decisions announced in November, adopted in the UK's interest. Similarly, the EU will consider equivalence when they are in the EU's interest.”

The Q&A largely re-states the position on financial services and equivalence as anticipated in recent months for an Agreement focused on trading in goods.  Alongside the TCA, however, the UK and EU made a series of declarations of future intent, the first of which was, as the Q&A noted, a Joint Declaration on Financial Services Regulatory Cooperation.  This provides for the UK and the EU to “establish structured regulatory cooperation on financial services, with the aim of establishing a durable and stable relationship between autonomous jurisdictions”, in particular to include “transparency and appropriate dialogue in the process of adoption, suspension and withdrawal of equivalence decisions”. 

During the TCA negotiations, the EU refused to entertain the UK’s proposals for such arrangements on the grounds that they would interfere in the EU’s regulatory autonomy.  It is notable that the Q&A restates that equivalence decisions are unilateral.  Hopefully, however, this declaration is a sign that such reluctance on the part of the EU was a negotiating tactic and that there is now space for putting future cooperation on a structured basis.

Yet even where granted, equivalence is still not a sufficient basis on which to found a cross-border financial services business.  The equivalence regimes are limited and fragmented, with significant areas of endeavour, including retail and wholesale financial services, excluded from their remit.  Under the relevant EU and UK law relating to equivalence, equivalence decisions can be withdrawn without cause at 30 days’ notice.  If the planned MoU does include a consultation process on the withdrawal of equivalence decisions, this risk will be reduced but not eliminated.  Businesses seeking to rely upon equivalence will still need to ensure that they have an alternative plan in place which can be activated swiftly in order to avoid a withdrawal of the equivalence regime they rely upon disrupting their business.

What should asset managers be thinking about as the TIP comes to an end?

Notifications to clients

Have you notified clients about your end of TIP plans in accordance with the requirements of the regulators? 

ESMA and other ESAs require the firms they regulate to inform their clients of the effect of Brexit and the end of the TIP on their investments and products, even if there may be no effect at all.  While the possibility of the ESAs enforcing this obligation on UK firms may now be remote, until 31 December, those obligations are binding on UK firms. 

The FCA has been more pragmatic and has not instructed firms specifically to communicate with clients about Brexit and the end of the TIP.  It has, however, noted the duty of firms to keep their clients informed about developments which will affect them.  So while no UK firm need be concerned about the FCA taking it to task for failing to write to clients unaffected by Brexit and the end of the TIP, for instance a UK investor in a UK fund which invests only in UK equities, those firms should have been communicating with clients in respect of aspects of Brexit and the end of the TIP which do affect them.

Documentation reviews

Have you considered how you might need to review your documentation?

Repapering exercises are generally driven by necessity and we know that uncertainty as to the shape of Brexit and whether or not there would be a UK-EU FTA and its terms has been a reason to postpone the necessary evil of repapering for the end of the TIP, however, when you next repaper you need to consider the following:

References to EU law

The European Union (Withdrawal) Act 2018 (as amended) onshores and saves EU law into UK law, which becomes “retained EU law”.  That onshoring process involves various amendments to make retained EU law work in the context of an independent UK, including changing references to EU institutions to UK institutions and removing reciprocal provisions, including those relating to passporting, which cease to operate at the end of the TIP.

Fund documents typically refer repeatedly to EU law, but after the end of the TIP, which version of EU law should that be - the UK retained EU law version, the EU version or both depending upon the context?  How will future amendments to the UK retained EU law version and to the EU version be taken (or not) into account?

While for a UK UCITS only selling to UK customers this may be a straightforward decision (albeit the necessary drafting is still somewhat involved), for funds which intend to continue to operate in both the UK and EU27 this decision will require some close legal scrutiny of the documents, with circumstances in which documents will refer to both UK retained EU law and EU law in respect of the same matter presenting the greatest drafting challenges.


Terminology will have to change too:

Pre end of TIP

UK fund after end of TIP

EU fund after end of TIP

UCITS (based in UK)



UCITS (based in EU27/EEA)



AIF (based in UK)



AIF (based in EU27/EEA)






Note that the FCA refers to what are commonly for convenience referred to as UK UCITS as simply UCITS and UK AIFs as simply AIFs.

UK firms intending to continue to do business in the EU27

The EU’s approach has consistently been to use Brexit and the end of the TIP to drive financial services business onshore to the EU27, and so providing financial services cross-border from the UK to the EU is difficult, with no transitional regimes, no financial services content in the UK-EU FTA and the most minimal and time limited equivalence possible for the EU without critically damaging its access to derivatives trading and share trading.

This presents UK firms intending to continue to do business in the EU27 with a lengthy checklist, which drives such a firm inexorably towards the conclusion that to operate freely in the EU27 a UK firms needs to set up a fully authorised subsidiary or branch in the EU with sufficient substance, physical presence and capital.  The alternatives, such as national private placement regimes (“NPPR”) and reverse solicitation have restrictions and difficulties, not the least of which are the significant variations in how they are applied by national competent authorities (“NCAs”), which make them suitable in only limited circumstances.

The checklist includes:

  • Is your business a regulated activity?
  • Do you have a branch or a subsidiary?
  • Have you obtained local authorisation?
  • Is your EU27 branch or subsidiary able to take advantage of passporting?
  • Do you comply with substance requirements?
  • Does your delegation strategy work?
  • Can your staff double hat and stay within regulation of managers and risk takers?
  • Can you rely upon Member State NPPR?
  • Can you rely upon reverse solicitation?
  • Does equivalence help?

Note that this checklist cannot just be considered once.  The EU and EU27 member state rules continue to evolve and currently ESMA are trying to influence the review into AIFMD to effect a wider review and formalisation of rules relating to substance, secondments and cross-border delegation.

UK firms intending to wind down their business in the EU27

In general, UK firms intending to wind down their business in the EU27 must cease all business on 31 December 2020.  This means not just new business but any servicing of existing contracts (lifecycle events) which are considered a regulated activity in the EU27 member state in which they take place.  Unfortunately EU27 member states have not put in place transitional regimes which would permit UK firms to run off their EU27 business by servicing existing contracts to their end.  To the extent that such lifecycle events are regulated activities, UK firms carrying them out after the end of the TIP may face criminal and civil liability.

The position is further complicated by UK firms’ FCA obligations to treat EU27 clients fairly and in accordance with UK law.  This may give rise to circumstances in which a UK firm with an EU27 client may find that if they don’t act, they are in breach of FCA requirements, but if they do act, they are in breach of the NCA requirements in the EU27 member state where the client is located.

EU27 firms intending to continue to do business in the UK

The UK’s policy is to ensure that at the end of the TIP the City of London retains and cements its position as an open global financial centre, including easing the transitions to becoming UK authorised and regulated for EU27 financial services firms which previously passported into the UK under EU legislation.  The UK has as noted above found the EU equivalent in respect of 28 aspects of financial services regulation and has put in place extensive temporary transitional regimes for EU27 firms which want to continue to do business in the UK.







All firms – general regulatory requirements

Temporary Transitional Power (“TTP”)

15 months


Temporary Recognition Regime

1 year


Transitional Regime

6 months

Credit rating agencies (“CRAs”)

Temporary Recognition Regime

1 year

Data service reporting providers (“DRSPs”)

Temporary Authorisation Regime

1 year

Electronic money institutions (“EMIs”)

Temporary Recognition Regime

1 year


Temporary Permission Regime (“TPR”)

Up to 3 years depending on landing slot


Temporary Permission Regime

Up to 3 years depending on landing slot

Payment institutions (“PIs”)

Temporary Recognition Regime

1 year

Trade repositories (“TRs”)

Temporary Recognition Regime

1 year

While the UK environment is intended to be welcoming it is still a regulated environment and EU27 firms wishing to continue to do business in the UK still have a checklist to consider, albeit one that presents those firms with a range of choices as to how to do so.

The checklist includes:

  • Is your business a regulated activity?
  • Do you have a branch or a subsidiary?
  • Have you given notification of participation in the Temporary Permissions Regime?
  • Are you ready to comply with the compulsory FCA and PRA rules which do not fall into the TTP regime as of 1 January 2021?
  • Do you comply with substance requirements?
  • Does your delegation strategy work?
  • Can your staff double hat and stay within regulation of managers and risk takers?
  • Can you rely upon s 272 FSMA or UK NPPR?
  • Might it be possible to rely upon the proposed overseas funds regime (“OFR”)?
  • Can you rely upon reverse solicitation?
  • Does equivalence help?

Note that this checklist cannot just be considered once.  UK financial services regulations will continue to evolve and diverge from EU rules, even if only by not tracking new EU regulations, and this may present both difficulties and opportunities.  Likely difficulties will arise for those firms required to meet both EU and UK regulations and reporting requirements.  While it is unlikely that such requirements will conflict in a way which means they exclude the possibility of operating across the UK-EU border, they may require two systems to be run and two sets of rules to be considered on each business decision.

EU27 firms intending to wind down their business in the UK

The UK has put in place a Financial Services Contracts Regime (“FSCR”) to allow EEA-based firms to run-off existing UK contracts and to conduct an orderly exit from the UK market.  Unlike the TPR, the FSCR does not allow firms in the regime to write any new business in the UK.  The FSCR provides that a firm is able to carry on a regulated activity only where it is necessary for the performance of a contract entered into prior to the end of the TIP, along with certain other specified activities. 

The FSCR provides a run-off period of 5 years for non-insurance contracts and 15 years for insurance contracts.

UK firms with EU27 service providers and EU27 firms with UK service providers

Firms which intend to continue to use service providers across the UK-EU27 border after the end of the TIP need to ensure that such arrangements will continue to work and that their service providers are prepared for the regulatory changes entailed. 

Maintaining these arrangements may give rise to some tension between different regulatory regimes.  UK UCITS with EU27 ManCos may be asked to review their relationship documents for those UK UCITS to meet reporting requirements under AIFMD and there may be issues to consider as a result of the EU27 ManCos’ NCAs treatment of  the UK UCITS as non-EEA AIFs from 1 January 2021.  From the point of view of those UK UCITS, their requirements under UK retained EU law is to report as UCITS.

Our Brexit tracker

Our Financial Services Brexit tracker “Helping you through changing times - Our European Brexit tracker for financial services institutions” provides a quick overview of the current position in relation to UK funds and UK fund managers seeking to sell services into EU27 countries after Brexit.

How Eversheds Sutherland can help

If you need help assessing how Brexit may affect your firm, we are able to help. Our lawyers and consultants have advised various institutions passporting into the UK from EU27 Member States and passporting from the UK into the EU27 on Brexit planning and Brexit related issues. We would be happy to discuss how we can help you with your Brexit planning, the execution of those plans and the communication with your clients about the affect of your plans upon them. For further guidance on the impact on your business, please get in touch.

To find out more on the implications of Brexit on your business, visit our Brexit hub.