An inquiry by the House of Lords EU Services Sub-Committee has concluded the sector’s needs have been overlooked by the government during Brexit negotiations, despite the fact it adds an estimated £224.8bn to the UK economy and provides some 4.6m jobs.

The committee’s chair, Baroness Donaghy, said: ‘A free trade agreement on services is no silver bullet, but there are a number of areas that both sides need to get right to limit potential barriers to trade.

‘It essential that issues such as EU member state national reservations to the agreement, the mutual recognition of professional qualifications and business mobility are dealt with properly in a future UK-EU agreement. These barriers to trade must be prevented.

‘Despite being so close to the end of the transition period, many businesses, especially SMEs, are not well prepared, not least because they are not sure what to prepare for.’

The report highlights a number of areas of specific concern, including the ability to travel between the UK and EU to deliver services at short notice. The committee wants the government to ensure that temporary business mobility is covered by an agreement with the EU, and that arrangements on the duration and nature of permitted business travel are comprehensive.

It cautions that the mutual recognition of professional qualifications is one area where, in its view, ‘a bad deal could be worse than no deal’.

The committee supports the UK's position that mutual recognition should be the default position as professionals will not be able to deliver their services if their qualifications are not recognised.

The Committee is alarmed about the lack of an EU decision on the data adequacy of the UK framework and the absence of most decisions on financial services equivalence and audit adequacy.  It says the government must push for these assessments to be concluded as soon as possible, to give businesses in the UK and EU legal certainty and time to prepare.

Organisations interviewed for the inquiry have flagged concerns about the lack of agreement on corporate forms, including limited liability partnerships, suggesting that potentially joint UK-EU ownership of audit firms will no longer be permitted in certain member states.

In his evidence, Dr Ilias Basioudis, senior lecturer, Aston University Business School, said: ‘A UK professional audit firm that wishes to own part of, or be part of the management body of, an EU firm will no longer be recognised among the required majority of EU qualified owners or managers. Similarly, ‘only [EU] owners or managers with equivalent qualifications recognised in the UK will count towards the majority of appropriately qualified owners or managers of a UK professional audit firm’.

The report states that the government indicated that it was proposing a novel solution regarding the ‘ownership, management and voting rights’ of audit firms, designed to avoid disruption to firms in both the UK and the EU, which may otherwise need to restructure their management or reallocate voting rights.

Under the proposals, regulators in the EU and the UK would agree to treat one another’s auditors and firms equally when deciding whether an audit firm is approved to practise. However, the committee was told that the Commission’s initial reaction ‘had not been encouraging’.

Equivalence

The report noted that managing both regulatory alignment and potential regulatory divergence will be critical in overcoming barriers to trade. 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 regulatory, supervisory and enforcement regime, and determines whether it is equivalent to their own.

If no positive equivalence determination on audit is agreed, then UK audit firms would be required 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.

Helen Brennan, a KPMG director who gave evidence to the inquiry,  warned that a lack of equivalence determination would be ‘grit in the wheel’ for UK auditors and that it ‘could contribute to a gradual erosion of trust in the audit itself’.

The report recommends that the EU and UK 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.

It says 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.

Useful links:

The future UK/EU relationship on professional and business services