By Gareth Jones This week represents the first working week for financial services firms operating under the UK’s new post-Brexit regime, in what promises to be a new era for the City of London. Although some of the key decisions about what a post-Brexit future will look like for financial services have yet to be taken. The EU-UK Trade and Cooperation Agreement (the “deal”), approved by the UK Parliament over the Christmas break (and approved on a provisional basis by the European Parliament), provided a degree of certainty for businesses. It will, after all, ensure that trade between the UK and EU will continue on a tariff-free and quota free basis (although the various non-tariff barriers and other implications of the 1,255-page long agreement are still being digested by businesses across a number of sectors). The City of London and UK financial services, however, must wait longer until they understand the likely future long-term UK-EU relationship and what it means in terms of market access and ongoing regulatory environment for banking, capital markets, asset management and insurance. The UK financial services industry, despite its size and importance to the UK economy (and its importance to EU capital markets), was not a prominent voice in negotiations and this marginalised role was very much reflected in the text of the final deal, which does not cover the sector in any great detail, beyond a few statements about the importance of working together. The immediate impact of this is that, following the end of the transition period, UK-based firms have lost their passporting rights to provide services across EEA countries, although EU-based firms can still continue to operate in the UK under the FCA’s temporary permissions regime (TPR) for a limited time period. The FCA have issued guidance on how UK firms can continue to provide services to customers following these changes. This may mean for instance, establishing subsidiaries in EEA states, changing products and services to ensure they are compliant with local regulations, or – in some cases – withdrawing services (while ensuring that customers are given sufficient notice). Overall, this means that the UK now has fewer rights in place with the EU than with other financial centres, such as New York and Singapore. The reaction to this from markets has been immediate, with the Financial Times reporting that yesterday, nearly €6bn of EU share dealing moved away from London to facilities in European capitals. For the longer term, the UK and EU have now agreed to discuss cooperation regarding financial services on a separate basis from the trade deal, with the aim of achieving an agreement via a memorandum of understanding (MOU) by March. Talks will begin this month and Treasury ministers and officials are now liaising with leading UK financial services representatives for their input. It is hoped that the MOU will contain some sort of deal on ‘equivalence’ – meaning that the UK and EU will permit access to each other’s firms to their market if both sides declare that the other’s regulatory framework in a particular area of finance is close enough to be “equivalent”. This deal would be less comprehensive than passporting and offers less certainty (it can be revoked at 30 days’ notice), but nevertheless, it is seen as a viable and desirable outcome for a significant portion of the sector. That said, it remains uncertain as to whether a substantial deal on an equivalence regime will be struck – and this comes down to how much the UK government wants to pursue its policy of regulatory divergence post-Brexit. The EU have made it clear in their trade deal explanatory document that, in terms of market access rights, “further clarifications will be needed” on “how the UK will diverge from EU frameworks after 31 December”. Meanwhile, statements made by the Prime Minister and the Chancellor over the Christmas period indicate a desire from the UK government to “do things a bit differently” in terms of financial regulation. There is significant political incentive for the current government to push for regulatory divergence – given that regulatory freedom was positioned as the key ‘win’ from trade negotiations. The Prime Minister, Chancellor and other leading Conservatives will want to show that the UK’s newly won regulatory freedom can deliver tangible benefits to UK financial services as well as other parts of the UK economy. It is likely that this desire will manifest itself in a new vision for the City of London, which could prioritise building closer links with financial centres outside of Europe (e.g., in Asia and the Middle East) and focus on shaping a regulatory environment which encourages new and emerging areas of finance, such as fintech and green finance. Expect to hear a lot from politicians on these issues over the next 12 months. The merits of this post-Brexit vision will undoubtedly be disputed by some of those in the sector. Many banks and fund managers have had to restructure their business and implement changes at great cost – and will view current market access rights with the EU as far from optimal. The debate concerning market access versus regulatory freedom is set to continue – with different parts of the City taking different views. Given the decisions the government needs to make in the coming months, these debates could prove significant. Indeed, after being side-lined for much of the Brexit negotiations over the past few years, financial services could play a greater role in the policy debate in 2021.