Delivering mutual recognition in financial services - The Berne Financial Services Agreement

On 21 December, we were treated to an early Christmas present. The City has long wanted trade deals that give access in financial services, as they do for goods and some forms of services. The post Brexit UK-EU Trade and Cooperation Agreement (TCA) for example does not cover financial services, and indeed is weak generally on services which account these days for about 80% of our economies. 

For various reasons, mainly the reluctance of national finance ministries and national (often independent) regulators to lock in access based on their opposite number’s rules and supervision, no trade deal or bilateral deal has ever done so. Perhaps it is fundamentally a question of trust. This is disappointing when so many of the leading financial centres work so closely together in setting common global rules and in co-supervising major financial institutions on a day to day basis. But it looks like we now have a breakthrough.  

The Berne Financial Services Agreement 

The UK and Swiss finance ministers signed an important bilateral financial services agreement in Berne on 21 December. The text of the ‘Berne Financial Services Agreement’ has been published and is now subject to parliamentary ratification in Switzerland. The UK Treasury has also published a useful paper outlining the benefits of the agreement.  

The agreement follows a joint ministerial statement from June 2020 that committed both sides to “Establish outcomes-based mutual recognition, facilitating the provision of relevant financial services from one jurisdiction into the other, and reducing regulatory frictions for cross-border activity”. Industry on both sides have strongly supported this process. 

How the agreement works 

For readers in the EU, mutual recognition sounds a lot like passporting in single market legislation. And indeed it is, but it is based on the principle of mutual recognition of, or deference to, each other’s regulatory regimes, rather than a detailed common set of rules as used as the EU basis for passporting. It is also a much more flexible and effective tool than the equivalence approach used in EU legislation to grant recognition to non-EU jurisdictions, since this too is based on a line by line assessment of the applicable rules. An outcomes based approach is much more efficient and dynamic, whilst also preserving both parties’ right to regulate. 

This agreement is important therefore because it really is an unprecedented bilateral agreement that allows cross border access in financial services. No trade deals anywhere in the world currently allow this and both sides are to be congratulated on their ambition. The agreement is based on positive core commitments - trust in each other's rules and supervision, confidence in international standards, and ongoing dialogue and cooperation. 

Mutual recognition is not a new concept. Global standard setters at the Financial Standards Board (FSB) in Basel have already called on regulators to enforce a "deference" based approach rather than an equivalence approach, for example in the June 2020 IOSCO paper (PDF), but so far no jurisdiction has taken this approach despite very detailed global rules on banking and securities set by the Basle Banking Committee and by IOSCO. So the UK and Swiss authorities are setting a much needed example. 

The scope of the agreement 

The agreement is broad in scope, covering banking, insurance, investment services and financial infrastructure. It allows firms who are not already authorised locally to provide certain services on a cross border basis. For example, a key ask of Swiss based asset management and advisory firms was access to UK high net worth individuals is included. So is access for UK non-life insurers in certain products to large clients in Switzerland without the need for localisation requirements. Both measures will increase customer choice while keeping the protection of local conduct of business rules and of home country prudential regulation. 

Building on the agreement from here 

This improved market access is good news. So is the commitment by both sides not to roll back any existing forms of cross border access already allowed in each jurisdiction. So two major and open financial centres have committed themselves to lock-in openness. Even better, the agreement commits to closer regulatory cooperation both bilaterally and multilaterally and to expanding the scope of mutual recognition in future.  

As I wrote in my last blog, some kind of mutual recognition is vital for new areas of regulation in sustainable finance if we are to see cross border investment in decarbonisation. It is especially welcome therefore that this agreement commits to facilitating such financial flows based on "mutual recognition of (...) mandatory climate-related corporate disclosures" (UK-Switzerland FS MRA).  

We are working on a more detailed industry paper setting out the implications of this ground breaking agreement. Watch this space.

About the author

Nick Collier joined the City of London Corporation as Managing Director of the Brussels office in March 2019. He was previously Global Head of Government Relations at Refinitiv (Thomson Reuters). Before that he worked at a range of organisations in the financial services sector, including Morgan Stanley and the Bank of England and, until recently, served as Chair of TheCityUK’s Public Affairs Group as well as Deputy Chair of the International Regulatory Strategy Group. Nick is chair of diplomatic engagement at the International Business and Diplomatic Exchange. He holds a MSC in Economics and Finance from the London School of Economics and a BA from Oxford.