Access to the EU single market and the free movement of the capital provide significant benefits for the EU-based financial market participants, i.e. with merely one single license issued in one Member State the financial market participant can freely operate in the whole EU market.
Taking advantage of such a benefit many fintech players were enabled to provide financial services across the whole EU from their one establishment in the UK.
However, the UK exit from the EU cut off access of the UK licensed market participants to the EU single market and, unfortunately, the UK-EU Trade and Cooperation Agreement does little to facilitate the UK based financial market participants’ access to the market. Therefore, from the 1st of January 2021 all financial market participants licensed in the UK lost their rights to offer their services to EU customers.
What has been done yet, the two sides have agreed to issue a Memorandum of Understanding regarding financial services regulation, financial stability and equivalence by the end of March 2021 that will give further clarity on the equivalence rules.
Equivalence refers to a decision by one state to recognise another state’s legal requirements for regulating a good or service; in practice, this means that a financial market participant would need only to comply with one set of requirements in both states and could access that state’s market pursuant to the scope given by that equivalence decision. Therefore, equivalence decision made by the EU would allow the UK to retain some rights to access the EU market.
However, it should also be noted that equivalence is not a substitute for the passporting rights created for the EU based financial market participants. Equivalence covers fewer services and allows operation in fewer areas, consequently it will not allow full access to the EU market for the UK based financial market participants.
Until today, European Commission has only granted time-limited equivalence decisions allowing UK central counterparties and central securities depositories market access in the EU.
Taking into account the uncertainty of the future equivalence decision and limited scope of operational rights granted with an equivalence, the UK based financial market participants wishing to continue the provision of financial services in the EU have to consider other market access measures, including:
- setting-up a branch in a Member State – although this will limit the right to provide financial services only in the market of that particular Member State; or
- establishing a fully authorized subsidiary in the Member State and passport its license across the EU.