No Deal Brexit and its impact on the mutual market access in the financial services sector

Following Boris Johnson’s election as new Prime Minister, the chances have increased that the UK is heading towards a No Deal Brexit.

Relations between Switzerland and the UK have been based to a large extent on the sectorial bilateral agreements with the EU which will cease to apply to the UK after its withdrawal from the EU. Thanks to the “Mind the gap” strategy adopted by the Swiss Federal Council, Switzerland and the UK have concluded bilateral agreements in a number of areas which could enter into force the day after the UK leaves the EU - 31 October 2019 being the latest (and probably last) deadline for the UK to agree to the Withdrawal Agreement proposed by the EU - in the case of a No Deal Brexit. While these bilateral agreements cover areas as important as trade, transport, direct insurance (except for life insurance) and citizen’s rights, they do not extend to banking and financial markets. These areas were not part of a sectorial bilateral agreement between Switzerland and the EU and the respective cooperation with the UK in these areas was rather conducted on a national level between the Swiss and the UK regulators which will continue also in the event of a No Deal Brexit.

Following this concept of cooperation the Swiss Financial Markets Supervisor Authority FINMA announced in its guidance 01/2019 that it would provisionally recognize certain derivatives regulations of the UK as equivalent with Swiss legislation. This step was necessary since the UK will no longer fall within the territorial scope of EMIR from the date it leaves the EU. The UK will, however, transpose these obligations into domestic law (EMIR Transposition Act). The provisional recognition of equivalence of the derivatives regulations of the UK with regard to (i) clearing obligation, (ii) reporting obligation and (iii) risk mitigation obligation, enables market participants subject to the Swiss derivatives regulation (FMIA), to comply with these obligations by fulfilling the corresponding UK regulations (substituted compliance). FINMA’s provisional recognition of equivalence of UK derivatives regulations will enter into force once the EMIR Transposition Act is passed by the British parliament.

While a No Deal Brexit might therefore only have a limited impact on the Swiss financial industry, representatives of the Swiss financial services sector perceive Brexit also as an opportunity for two of the leading financial centers in Europe to join forces and eventually liberalizing the mutual market access based on the concept of mutual recognition of the other country’s financial market regulation and supervisory authority. Although at the time the first priority of the UK is clearly to clarify its relations with the EU, the bilateral relations with Switzerland in the financial services sector have also been identified as a topic of interest by representatives of the financial industry in the UK. A “Switzerland Market Advisory Group” was launched by TheCityUK, the industry-led body representing UK-based financial and related professional services, bringing together senior practitioners from the UK to engage with Swiss industry counterparts. This high level industry group pursues, amongst others, to (i) establish priorities for the financial services industry within a bilateral trade agreement and (ii) seek opportunities for the both countries to work together in third markets and multilateral fora.

We will be closely monitoring the results of these joint efforts which may eventually result in the financial markets being included in bilateral service agreement between Switzerland and the UK. Needless to say that this will, as a matter of fact, to a large extent depend on how Brexit plays out.