158.The main barriers to trade in professional and business services are regulatory, so managing both regulatory alignment and potential regulatory divergence will be critical in overcoming barriers to trade.
159.In over 40 specific areas of financial services and audit, this is managed through an equivalence framework, whereby one Party assesses another’s regulatory, supervisory and enforcement regime, and determines whether it is equivalent to their own. This process is separate from the negotiations on the FTA. The result of a mutual positive equivalence determination is that each side’s competent authorities can rely on decisions of equivalent entities in ensuring compliance with the appropriate standards.
160.But equivalence is not a static, one-off decision. Even if the UK and EU agree reciprocal equivalence arrangements, future regulatory divergence remains likely. In such circumstances, equivalence needs to be underpinned by structured regulatory dialogue and cooperation, to manage potential divergence. Ideally, there would also be an agreed framework for orderly withdrawal of equivalence. As we concluded almost four years ago:
“While the UK might be deemed equivalent at the point of withdrawal, there is no guarantee that it will remain so. Regulation must adapt to changes in the financial services system, raising the risk of regulatory divergence … The Government should encourage direct regulatory cooperation between UK and EU authorities and … should seek UK input to EU regulation-setting upstream.”
161.In the Political Declaration the UK and EU agreed that they should assess each other for equivalence by the end of June 2020. Given the interdependence between the professional and business services sectors and the financial services sector, there is a risk, as Nick Owen told us, that any “lack of confidence in the UK as a place of financial services” could have a “knock on” effect for professional and business services. Simon Hart agreed, telling us that it was “vital that this is dealt with, because it will have an impact across the complete spectrum of business”. In the following paragraphs we illustrate this potential impact, focusing on the audit sector.
162.While the UK remains in the Single Market, as Sally Jones told us, “audit working papers prepared by a firm in one country can be relied on by a firm in another country without adverse regulatory impacts”. From 2021 onwards, as Helen Brennan explained, UK auditors will have to “go through a registration process with the oversight body” of each Member State to ensure recognition of their audit reports of UK companies listed on EU markets. Helen Brennan noted that this “has structural importance, because we are talking here about companies that have chosen to list debt and equity on recognised markets in other countries”.
163.The Commission (or, failing that, individual Member States) may adopt a decision recognising the equivalence of a third country’s audit oversight framework. This decision means, as the Minister put it, that “two jurisdictions achieve comparable outcomes in audit regulation”. The Government had “responded to the Commission’s questionnaire on audit equivalence … in early June” and was awaiting a response. Equivalence applies in both directions, and the Minister added that the Government was also “assessing the EU for equivalence and audit adequacy in parallel”.
164.The Statutory Audit Directive also allows for adequacy decisions in respect of third countries’ oversight bodies—in the UK, the Financial Reporting Council (FRC). The Minister explained that adequacy “enables audit regulators to share sensitive working papers”. Again, he confirmed that the UK had provided the necessary information to the Commission in early June.
165.TheCityUK stated that a positive equivalence determination on audit would “remove the requirement for UK audit firms to register with EU regulators and be subject to regulatory inspections and potentially overlapping regulations in cases of cross-border listings between the EU and the UK”. In contrast, if there is no positive equivalence determination for audit oversight, Helen Brennan warned that there would be “grit in the wheel” for UK auditors and that it “could contribute to a gradual erosion of trust in the audit itself”.
166.The EU’s decisions on equivalence of the UK’s audit framework and adequacy of the FRC are not part of the trade negotiations: they will be unilateral decisions. The same holds true of the Government’s deliberations in respect of the EU. Nevertheless, as with other technical areas, there is a risk that the current tensions in the future relationship negotiations could spill over into the technical process of assessing equivalence. In a letter to the Chancellor of the Exchequer dated 27 March 2020, the EU Financial Affairs Sub-Committee raised the concern that while the UK is currently fully aligned with the UK, so in a technical sense granting equivalence should not be controversial, there is a risk that these decisions could be “politicised, influenced by the broader negotiations on the UK-EU relationship and a desire on the part of EU Member States to attract business”.
167.In response, John Glen MP, the Economic Secretary to the Treasury, said that the Government was seeking “clear and coherent structures in place in the event that equivalence is withdrawn by either party”, adding that “the UK will seek to ensure the transparency and stability of an equivalence-based relationship while not compromising its autonomous nature”.
168.Subsequently, on 16 July, the Minister, Nadhim Zahawi MP, told us:
“Reciprocal equivalence and adequacy decisions, we very passionately believe, would reduce regulatory overlap and cost to regulators, to firms and, ultimately, to their clients and the economy. They will also enable continued regulatory co-operation between us and the EU. This will support really effective enforcement and supervision, which, if you break all this down, is ultimately at the heart of this, because it is in the public interest.”
169.However, in a footnote to a Communication on Brexit readiness on 9 July 2020, the Commission had added decisions under the Statutory Audit Directive to the list of equivalence/adequacy determinations that the “Commission will not adopt an equivalence decision on in the short or medium term”.
170.Subsequently, in a letter dated 21 September, the Economic Secretary to the Treasury told us that while these assessments should be “straightforward”, the EU had “decided to make, at most, limited equivalence decisions with respect of the UK”. The Minister stated that the “Government is considering next steps”. This remains a significant concern, given that businesses across the financial and non-financial services sectors have been clear that they will need certainty on equivalence in good time to prepare for the end of the transition period.
171.The PBSC raised the concern that “continued regulatory cooperation is needed to avoid any unintended removal of mutual market access in cases of regulatory divergence”. The PBSC was concerned that equivalence decisions could be “revoked with little warning”, as under EU rules some can be withdrawn with as little as 40 days’ notice. We have previously raised similar concerns, including in our March letter to the Chancellor:
“There should be regular and structured regulatory dialogue to provide a forum for discussion and resolving any possible disagreements. There should be a phased approach to any withdrawal of equivalence decisions, with clear timelines and consultation with the industry.”
172.Such concerns were in fact anticipated in the October 2019 Political Declaration, which, sketched out a holistic approach to equivalence, calling for “transparency and appropriate consultation in the process of adoption, suspension and withdrawal of equivalence decisions” (paragraph 37). In the current inquiry, the PBSC similarly recommended “intra-institutional architecture to be established between the UK and the EU to ensure that the impact of any divergence is understood and intentional.” But as the European Union Select Committee noted in its March 2020 report comparing the UK and EU negotiating positions, the EU’s position on structured cooperation had already weakened, while the Government continued to advocate “structured withdrawal of equivalence findings”. In response to our letter, John Glen MP, the Economic Secretary to the Treasury, reiterated that the Government was seeking “clear and coherent structures in place in the event that equivalence is withdrawn by either party”. That remained essentially the position when the Minister, Nadhim Zahawi MP, updated us in July 2020.
173. We encourage both Parties to adopt decisions on the equivalence of each other’s audit frameworks and adequacy of competent authorities well ahead of the deadline of 31 December 2020, irrespective of developments in the broader negotiations, to avoid unnecessary complexity and uncertainty, particularly for auditors and their clients.
174.The UK and EU should come to an agreement on a structured process for any regulatory divergence in areas covered by the equivalence and adequacy regimes, including under the Statutory Audit Directive. Both sides should also agree a dispute resolution mechanism for the structured withdrawal of equivalence with suitable notice periods.
175.Witnesses across professional and business services sectors also highlighted the need for continued structured regulatory cooperation between the relevant UK, EU and Member State authorities and regulatory bodies. Given that trade in services is largely dependent on regulatory harmonisation, witnesses highlighted the importance of cooperation between regulators to ease trade in services.
176.TheCityUK set out the key priorities for continued structured regulatory cooperation:
“The framework for the future relationship should be based on structured cooperation which: ensures autonomy of decision making of both the UK and EU; aligns closely with international standards to reduce fragmentation; and, supports economic growth and investment in the UK and EU, minimising disruption and the social and economic consequences of the changed relationship.”
The objectives of regulatory cooperation thus include the avoidance of barriers to trade, enhancing the efficacy of regulation, preventing sudden shocks due to short-notice changes of regulation, and enabling innovation in regulatory practices.
177.Regulatory cooperation will look different for each sector within professional and business services. For accounting and audit, CIMA told us that both the UK and EU “have a shared interest in ensuring a high global standard of accounting and audit practices” through cooperation between the relevant regulatory bodies. The legal sector will be heavily reliant upon regulatory cooperation on the mutual recognition of professional qualifications (see Chapter 6). The architectural and engineering sectors will require continued dialogue between regulators on technical specifications. The Advertising Standards Authority, on the other hand, will remain a member of the European Advertising Standards following the end of the transition period, as the body is separate from the EU.
178.The Scottish Government emphasised that an agreement on regulatory cooperation should include “meaningful engagement and input from the devolved administrations, given so much of regulation is devolved”, and also bearing in mind “the divergence between Scottish Government and UK Government position in some areas of regulation”.
179.The Government’s written evidence stated: “The UK is seeking to agree commitments which provide the opportunity for both Parties and their Competent Authorities to discuss their respective approaches to regulating services and investment.” The Government cited the example of the Architects Registration Board’s work with the European Network of Architects Competent Authorities, which “developed a mutually acceptable standard for the format of their authorities’ certificates”.
180.In relation to services regulation, both the UK and EU texts call for any technical standards to be developed through “open and transparent processes”. The UK text also sets out a framework for regulatory dialogue to “promote further services liberalisation,” through: “(a) discussing regulatory approaches; (b) sharing best-practice and expertise; (c) participating in international dialogues; and (d) sharing trade-related information”.
181.The UK draft legal text includes provision for each Party to submit comments on any new regulatory measures. The stated aim of such a mechanism is to “allow the other Party to assess whether and how their interests might be significantly affected”. The UK has also proposed several committees—including on services and qualifications—to promote regulatory dialogue between the UK and EU. The Law Society of England and Wales suggested a dedicated committee or sub-committee on professional and business services, which could “help foster a better dialogue between the parties”.The Government’s proposals, if adopted, could go some way to meet such concerns within the sector. The EU’s draft legal text does not go into as much detail on the structure of governance arrangements for managing regulatory cooperation. The Law Society of England and Wales suggested a dedicated committee or sub-committee on professional and business services which could “help foster a better dialogue between the parties”.
182.Shanker Singham said that these draft texts were “quite encouraging”, as both sides were “committed to good regulatory practices, which is a term of art in trade negotiations”. The Law Society of England and Wales also called the UK’s proposals on regulatory cooperation in services “encouraging”.
183.Given that trade in professional and business services is dependent on good regulatory practices, we welcome both sides’ commitment to ensuring continued regulatory dialogue. This will help to provide certainty to businesses and ensure best practice is shared.
184.The governance arrangements for regulatory dialogue should include a dedicated UK-EU committee on professional and business services, which could help to ensure that these sectors are not overlooked.
213 European Union Committee, (9th Report, Session 2016–17, HL Paper 81), para 59
214 So far, the EU has only granted a time-limited equivalence decision for the United Kingdom for central clearing counterparties (CCPs) of derivatives
219 Directive 2014/56/EU of the European Parliament and of the Council of 16 April 2014 amending Directive 2006/43/EC on statutory audits of annual accounts and consolidated accounts, , 16 April 2014
222 Written evidence from the TheCityUK ()
224 Letter from Lord Sharkey, Chair of the EU Financial Affairs Sub-Committee, to the Rt Hon. Rishi Sunak MP, Chancellor of the Exchequer, 27 March 2020: [accessed 8 September 2020]
225 Letter from John Glen MP, Economic Secretary to the Treasury, to Lord Sharkey, Chair of the EU Financial Affairs Sub-Committee, 27 May 2020: [accessed 8 September 2020]
227 Communication from the commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions Getting ready for changes Communication on readiness at the end of the transition period between the European Union and the United Kingdom, , July 2020.
228 Letter from John Glen MP, Economic Secretary to HM Treasury, to Baroness Donaghy, Chair of EU Services Sub-Committee, 21 September 2020: [accessed 8 October 2020]
229 Written evidence from the PBSC ()
231 Letter from Lord Sharkey, Chair of the EU Financial Affairs Sub-Committee, to the Rt Hon. Rishi Sunak MP, Chancellor of the Exchequer, 27 March 2020: [accessed 8 September 2020]
232 Written evidence from the PBSC ()
233 European Union Committee, (8th Report, Session 2019–20, HL Paper 32), para 70
234 Letter from John Glen MP, Economic Secretary to the Treasury, to Lord Sharkey, Chair of the EU Financial Affairs Sub-Committee, 27 May 2020: [accessed 8 September 2020]
236 Written evidence from TheCityUK ()
237 Written evidence from CIMA ()
238 Written evidence from the Advertising Association ()
239 Written evidence from the Scottish Government ()
240 Written evidence from BEIS ()
242 HM Government, Task Force for Relations with the United Kingdom, Draft working text for a comprehensive Free Trade Agreement between the United Kingdom and the European Union, Chapter 12, Article 12.3: [accessed 28 September 2020] European Commission, Task Force for Relations with the United Kingdom, Draft text of the Agreement on the New Partnership with the United Kingdom, Article SERVIN 5.10 (18 March 2020): [accessed 26 August 2020]
243 HM Government, Task Force for Relations with the United Kingdom, Draft working text for a comprehensive Free Trade Agreement between the United Kingdom and the European Union, Article 12.3: [accessed 28 September 2020]
244 Ibid., Article 12.11
245 Ibid., (Article 30.3)
246 Written evidence from the Law Society of England and Wales ()
248 Written evidence from the Law Society of England and Wales ()