The European Union has a single rulebook for financial services and harmonised standards of financial regulation and supervision.

This allowed for ‘passporting’ arrangements between EU member states – where a firm undertaking a financial activity in one EU member state can apply for a passport to conduct the same business throughout the EU.

However, these passporting arrangements came to an end on the expiry of the transitional period on 31 December 2020. The main fallback option for UK financial services firms operating in the EU is the ‘equivalence’ regime.

Jason Porter, director of specialist expat financial advisory firm Blevins Franks, explains: “The EU allows third-state financial firms market access if it believes that state’s regulatory regime is equivalent to, or closely aligned with, those of the EU.

“But it seems inevitable that at some point the UK will come into conflict with the EU, while the government sees one of the fundamental benefits of leaving the EU is the ability to be able to set its own rules in all areas of business.

“Businesses thrive on certainty and this potential area of friction is compounded by the fact the EU can revoke clearance in any area of the equivalence regime with only 30 days’ notice.”

Brexit uncertainly means some firms have chosen to set up in the EU. Asset managers and investment management firms have typically favoured Dublin, while investment banks have moved staff and assets to Frankfurt and Paris. But for many this is simply not a viable option.

Porter said: “Another consideration is the regime itself. Under MiFID II, third-country investment firms located in an ‘equivalent’ jurisdiction can seek clearance to provide services on a ‘wholesale’ basis (i.e. to non-retail clients, which the EU defines as ‘eligible counterparties’ and ‘professional clients’). Wholesale would include where a UK pension scheme, SIPP or investment bond has appointed an investment manager, on behalf of scheme – or policyholders.”

The MiFID II provisions were amended in December 2019 and will apply from June 2021. The changes make the MiFID II regime far more onerous than any other EU equivalence regime.

UK asset managers and investment management firms will have two main concerns in deciding on whether to choose the EU’s equivalence option

First, maintenance of immaculate records and standards are irrelevant if the UK decides to diverge from the EU’s financial rulebook. Second, the demands of the rules from a time and staffing and cost perspective may mean they are not a viable option for many UK firms.

“As a result, there is already evidence emerging of UK citizens receiving letters from their pension scheme and investment bond providers confirming they will need to find new investment managers,” said Porter, “The majority of UK investment firms are not aware of the position they are in yet and have not advised their British clients who live in the EU of their intentions. Many may not get to this point until mid-2021, when the new MiFID II third-country investment firm requirements become real. This is likely to lead to another headache for UK nationals living in the EU.”