Brexit update for financial services firms - week ending 27 July 2018

United Kingdom

The week in outline:

On 24th July the UK Government published a White Paper (see Document 1 below) explaining the domestic legislation which would implement the proposed UK/EU Withdrawal Agreement (the ‘WA’). The draft WA deals with various issues, but there are no sector-specific arrangements for financial services (‘FS’). For FS, the most important aspect of the WA is the transition/implementation period from 29/3/19 to 31/12/20 (the ‘TP’). (For further information about the WA – see our update for the week ending 13 July and 29 June 2018). Other WA provisions (about the financial settlement, citizens' rights and the Irish back-stop etc.) are more permanent or long term in nature and will not fall away on 1 January 2021.

In essence the effect of the TP is that EU law will continue to apply in the UK (and the UK will continue to operate within the Single Market) until 31/12/20, despite the UK’s exit from the EU on 29/3/19. This is at odds with the recently enacted European Union (Withdrawal) Act 2018 (EUWA) and all the secondary legislation that is being promulgated under that act. In very broad terms, therefore, there would be fresh primary legislation, the EU (Withdrawal Agreement) Bill (‘the Bill’), which would implement the WA. The Bill would in large part defer the operation of the EUWA legislation so that it does not take effect on exit on 29/3/19.

In overview, therefore, the plans for UK legislation in FS depend on the outcome of the UK/EU negotiations:

  • For a ‘no-WA’ scenario, the UK legislation for exit on 29/3/19 is the EUWA and the extensive secondary legislation being promulgated under that act. The EUWA provides for (inter alia) the onshoring/porting/domestication of ‘retained EU law’, the modification of retained EU law under section 8 and the repeal of the European Communities Act 1972. The first draft SIs for FS under section 8 are now starting to be published – see Documents 2 to 4 below. Single market DRC[1], such as passporting rights, will cease to apply/be turned off on 30/3/19. The SI at Document 2 provides transitional arrangements/relief (on a unilateral rather than bilateral basis) for incoming EEA firms (which would otherwise cease to be permitted to conduct UK business on 30/3/19) in the form of a temporary permission regime. Some of secondary legislation under section 8 EUWA is being produced by HMT and in some areas (rulebook and BTS amendments) the changes are being produced by the UK regulators (see our update for the week ending 29 June 2018)
  • If the WA is agreed and ratified there would be no need for extensive changes on 29/3/19, or during the TP, as EU law would continue to apply in the UK and the FS single market regime (including single market DRC such as passporting) would continue to operate as if the UK were still a Member State. The Bill would therefore amend and defer much of the EUWA regime (see further below).
  • There would be the possibility of another ‘no-deal’ scenario at the end of the TP (on 31/12/20), because the WA will only include a non-binding political declaration on the future relationship. This scenario may require fresh domestic legislation at the time, but, in principle, much of the deferred EUWA legislation would kick in on 1/1/21 when single market DRC was turned off (domesticating/porting retained EU law, repealing the ECA and bringing the modifications under section 8, such as the temporary permissions regime, into effect.)
  • Her Majesty’s Government (‘HMG’) apparently believes that the negotiation of the future relationship treaty can be concluded and the treaty, as well as the necessary transitional arrangements, brought into effect in time for 31/12/20. The transition, however, from EU law/Single Market under the TP to the permanent relationship under the new treaty may not be so smooth and quick. There may need to be additional stages in the process, such as further bridging/interim arrangements and/or extensions of the TP. Against this background and because the nature of the future relationship is unknown, it is difficult, at this point, to speculate about the UK legislation that would be required. HMG’s new proposals for FS are that the UK would leave the Single Market without retaining or replacing any single market DRC arrangements. More limited DRC would be based only on that available under the (possibly extended) EU third country provisions. One would therefore imagine that all single market DRC would be turned off and the EUWA legislation provisions above would apply as a relevant starting point in this scenario. It may be that DRC would be dealt with under ‘autonomous’ processes on each side (as Michael Barnier has insisted – see Document 5 below) without treaty based rights for firms or even at a state to state level. UK legislation may be required to mirror DRC available under EU third country provisions (so the UK could grant equivalent treatment for EU firms) and other aspects such as regulatory cooperation. Document 4 below is an example of how DRC can be achieved through modifications to the ported/onshored version of retained EU law (this modifies the UK version of EMIR to establish a regime for UK recognition of non-UK central counterparties which mirrors the EU/EMIR equivalence regime for third country counterparties). It is too early to speculate as to the policy on retained EU law in FS. There is the question whether the UK would port across all retained EU law at that point, with only the modifications necessary under the principles of section 8 EUWA, or would the UK FS legislation/rulebook undergo more extensive policy changes at that point?

The White paper addresses the issues under the second bullet above:

“On exit day (29 March 2019) the EU (Withdrawal) Act 2018 will repeal the ECA. It will be necessary, however, to ensure that EU law continues to apply in the UK during the implementation period. This will be achieved by way of transitional provision, in which the Bill will amend the EU (Withdrawal) Act 2018 so that the effect of the ECA is saved for the time-limited implementation period.”

“This means that some provisions of the EU (Withdrawal) Act 2018 will not now be needed until the end of the implementation period. The Bill will therefore need to amend the EU (Withdrawal) Act 2018 so that the conversion of EU law into ‘retained EU law’, and the domestication of historic CJEU case law, can take place at the end of the implementation period.”

“These powers [under section 8 EUWA] are currently sunsetted to two years after exit day (29 March 2021). […] Whilst the Government would hope to make any corrections before the end of the implementation period, it is possible that some deficiencies will only become apparent after the conversion of EU law has taken place. The Bill will therefore amend the sunset on the correcting power at section 8 of the EU (Withdrawal) Act 2018 so that the power expires on 31 December 2022. This arrangement will preserve Parliament’s intention when it passed the EU (Withdrawal) Act 2018 […]”

The jurisdiction of the CJEU in the UK will continue during the TP: “The binding nature of CJEU rulings is currently given effect through the ECA. By saving the effect of the ECA for the time-limited implementation period, the role of the CJEU will also be preserved during this period.”

Temporary permission/recognition regimes under section 8 EUWA. Two draft SIs under section 8 were published. These make modifications to FSMA[2] and to the domesticated/ported/on-shored version of EMIR[3] to deal with the turning off of single market DRC. The first relates to incoming EEA financial services firms (see the ‘EEA Regulation’ document 2 below) and turns off their passport rights, so that they may need to apply to UK regulators for UK authorisation. The second relates to central counterparties (‘CCP’) (see the ‘CCP Regulation’ document 4); this turns off the rights of non-UK CCPs under EMIR, so that they may need to apply to for recognition from the Bank of England; this applies both to EU based CCPs and to those from outside the EU that have been recognised by ESMA (following an equivalence decision for their home country). Both SIs have a transitional regime in the form of temporary permission/recognition.

The FCA explains (see Document 3): “under the temporary permissions regime, EEA firms currently passporting into the UK which notify us of their activities will be given permission under Part 4A of the Financial Services and Markets Act 2000 (FSMA) on a temporary basis. The scope of the permission will reflect the scope of a firm’s passporting permission pre-Brexit.” This regime would be in place for three years following exit day. Importantly, “these rights could be on a freedom of establishment, a freedom to provide services basis or both.” So the regime would also apply to EEA firms that are not (yet) established in the UK. Firms need to notify their regulator (PRA or FCA). “The notification window will close prior to exit day.” The temporary recognition regime for CCPs is similar and would enable non-UK CCPs that are currently able to operate in the EU under EMIR to continue to operate in the UK after Brexit.

Department for Exiting the EU: Legislating for the Withdrawal Agreement between the UK and the EU

The White Paper confirms that the EU (Withdrawal Agreement) Bill will: be the primary means by which the rights of EU citizens will be protected in UK law; legislate for the time-limited implementation period; and create a financial authority to manage the specific payments to be made under the financial settlement, with appropriate Parliamentary oversight. The White Paper can be accessed here.

“55. The Withdrawal Agreement states that the implementation period will run from the moment of exit until 31 December 2020, a period of 21 months. This strictly time-limited period is intended to provide an opportunity for businesses and public authorities in the EU and the UK to prepare for a smooth and orderly transition to our future relationship.”

“57. During the implementation period, EU law will continue to apply to and in the UK under the terms set out in the Withdrawal Agreement. New pieces of directly applicable EU law that are introduced will continue to apply automatically within the UK; other new EU measures introduced during the implementation period will need to continue to be implemented domestically.”

“60. On exit day (29 March 2019) the EU (Withdrawal) Act 2018 will repeal the ECA. It will be necessary, however, to ensure that EU law continues to apply in the UK during the implementation period. This will be achieved by way of transitional provision, in which the Bill will amend the EU (Withdrawal) Act 2018 so that the effect of the ECA is saved for the time-limited implementation period. Exit day, as defined in the EU (Withdrawal) Act 2018, will remain 29 March 2019.”

“69. As above, EU rules and regulations will continue to apply in the UK during the implementation period. This means that some provisions of the EU (Withdrawal) Act 2018 will not now be needed until the end of the implementation period. The Bill will therefore need to amend the EU (Withdrawal) Act 2018 so that the conversion of EU law into ‘retained EU law’, and the domestication of historic CJEU case law, can take place at the end of the implementation period.”

“71. The Bill will also amend the correcting powers in the EU (Withdrawal) Act 2018 to allow them to correct deficiencies arising from withdrawal and the end of the implementation period.”

“73. Whilst the Government would hope to make any corrections before the end of the implementation period, it is possible that some deficiencies will only become apparent after the conversion of EU law has taken place. The Bill will therefore amend the sunset on the correcting power at section 8 of the EU (Withdrawal) Act 2018 so that the power expires on 31 December 2022. This arrangement will preserve Parliament’s intention when it passed the EU (Withdrawal) Act 2018 to give the UK Government and the devolved administrations two years beyond the end of the application of EU rules and regulations in the UK to ensure that the UK has a functioning statute book.”

“78. As part of delivering a smooth and orderly exit, the UK and the EU have agreed that during the implementation period, the existing EU mechanisms for supervision and enforcement will continue to apply to the UK.”

“79. During the implementation period, the UK will maintain the same recourse to the EU’s judicial review structures as a Member State. Should the UK have concerns about the implementation or application of EU law during the implementation period, it will retain the same formal ability to challenge such action as a Member State.”

“80. The binding nature of CJEU rulings is currently given effect through the ECA. By saving the effect of the ECA for the time-limited implementation period, the role of the CJEU will also be preserved during this period. This will also be facilitated by amendments in the Bill to the EU (Withdrawal) Act 2018, so that sections of that Act which end the jurisdiction of the CJEU in the UK take effect at the end of the implementation period.”

“93. It is in everyone’s interests - the UK, the EU and third countries - that international agreements continue to apply to the UK during the implementation period. There is a willingness to find a pragmatic way to ensure continuity of international agreements and thereby minimise the impact of the UK’s departure on them. A number of countries have already welcomed this approach publicly, which is encouraging.”

“94. The continued participation of the UK in these international agreements will need to be provided for by the Bill. To the extent international agreements are considered a part of EU law under the Withdrawal Agreement, they would be given effect in the UK through the saved and repurposed ECA mechanisms.”

“96. The Withdrawal Agreement also explicitly states that the UK will be able to negotiate, ratify and sign international agreements - including new free trade agreements - during the implementation period. These new agreements can be brought into force immediately after the implementation period. These new agreements will not be covered in this Bill, but will be provided for in separate legislation as appropriate. This means that the UK will be able to lead an independent trade policy for the first time in over 40 years.”

The EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018 (Draft)

The draft SI will amend references to EEA passporting rights in domestic legislation, which will become deficient as a result of Brexit. The SI implements a temporary permissions regime to put forward such legislation to enable EEA firms and funds operating in the UK via a financial services passport to continue their activities in the UK for a limited period after exit day in order to allow them to obtain UK authorisation or transfer business to a UK entity as necessary. The drafting approach of the SI, and other technical aspects of the proposal, may be subject to amendment before the final instrument is laid before Parliament. This will include, for example, the addition of provision on the continuity of taxation, which will not affect the design or operation of the temporary permissions regime. The SI can be accessed here.

FCA: The Temporary Permissions Regime for Inbound Passporting EEA Firms and Funds – Our Approach

Further to the draft SI on temporary permissions, FCA has published this webpage which includes the regulator's initial views on the rules it proposes will apply to firms while they are in the regime; which firms and funds can use the temporary permissions regime and the process by which firms and funds will need to notify FCA that they want to enter the regime and obtain a temporary permission. The webpage can be accessed here

“Under the temporary permissions regime, EEA firms currently passporting into the UK which notify us of their activities will be given permission under Part 4A of the Financial Services and Markets Act 2000 (FSMA) on a temporary basis. The scope of the permission will reflect the scope of a firm’s passporting permission pre-Brexit.”

“If required the temporary permissions regime will come into force when the UK leaves the EU on 29 March 2019 at 23:00. We expect the regime will be in place for a maximum of three years within which time firms and funds will be required to obtain authorisation or recognition in the UK.”

“Firms which can use the regime:

  • Firms which have passports under Schedule 3 to FSMA in place before exit day, including firms with top-up permission.
  • Treaty firms under Schedule 4 to FSMA which qualify for authorisation before exit day, including firms with top-up permission.
  • Electronic money and payment institutions who are exercising their passporting rights under the Electronic Money Directive (EMD) or the Payment Services Directive (PSD2) before exit day.

These rights could be on a freedom of establishment, a freedom to provide services basis or both.”

“Firms will need to notify us that they wish to use the temporary permissions regime. This will be an online process and we expect to open the notification window in early January 2019. The notification window will close prior to exit day.Once the notification window has closed, firms that have not submitted a notification will not be able to use the temporary permissions regime.”

“As firms in the regime will have Part 4A permission, the home-host state restrictions on regulatory action will no longer apply and they will come within the full scope of our supervision and rule-making powers. In implementing the regime, we will seek to take a proportionate approach that will enable firms to comply with our requirements from Day 1 while maintaining an adequate level of consumer protection.”

“We will consult in Autumn 2018 on the detail of the rules that we propose should apply to firms and funds while they are in the regime, including fees and levies. The Consultation Paper will also set out further details of how the regime will operate. We will then publish a Policy Statement and final rules early next year.”

The Central Counterparties (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018 (Draft)

This SI is being made using powers in the European Union (Withdrawal) Act 2018 and amends EMIR in relation to the recognition of third country CCPs and makes consequential amendments and transitional provisions. The SI can be accessed here.

EC: Speech by Michel Barnier

Text of Michel Barnier's speech of 26 July 2018 follows. The full speech can be accessed here. See also Dominic Raab’s statement here.

“A clear example of what this means concerns our future relationship in financial services.

We discussed financial services this week and agreed that future market access will be governed by autonomous decisions on both sides.

We recognised the need for this autonomy, not only at the time of granting equivalence decisions, but also at the time of withdrawing such decisions.

And we agreed to have close regulatory cooperation, which will also have to respect the autonomy of both parties.”

Other publications from the RegZone Brexit news feed

HMT: EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018: explanatory information

The explanatory memorandum accompanying and explaining the EEA Passport Rights SI. The memorandum can be accessed here.

HMT: Explanatory Memorandum to Central Counterparties (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018

The explanatory memorandum accompanying and explaining the Central Counterparties SI. The memorandum can be accessed here.

BoE/PRA: Temporary permissions and recognition regimes

The BoE/PRA have published an article on their website explaining the impact of the temporary permission/recognition regime that has been introduced by the Government through two SIs. The article can be accessed here.

HoC Library Report: UK Adoption of EU External Agreements After Brexit

This HoC library briefing looks at how many international agreements the EU has; "mixed" agreements; the rollover of EU's international trade agreements and international agreements during the transition phase. The briefing paper can be accessed here.

Department for Exiting the EU: Interview with Greg Clark: Brexit White Paper

The text of an interview given with Le Figaro has now been published. It can be accessed here.

FCA/Practitioner Panel: Joint survey

This is the second joint survey of regulated firms to monitor the industry’s perception of FCA and to what extent it is meeting its objectives. Participants in the survey were asked, amongst other matters, to consider how FCA had communicated with firms with regard to Brexit preparations. A number of areas for improvement were identified which FCA intends to address over the coming year, including facilitating innovation within UK financial services; transparency of regulation and more forward-looking regulation. The survey can be accessed here.

HoC The Exiting the European Union Committee: The progress of the UK's negotiations on EU withdrawal: the rights of UK and EU citizens

This report calls for urgent clarification from the EU27 on the preparations that they are making to regularise the status of UK citizens in each Member State. The report can be accessed here.

HoL Secondary Legislation Scrutiny Committee: Draft Financial Regulators’ Powers (Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018

The draft SI is "drawn to the special attention of the House". The report can be accessed here.

HoC European Scrutiny Committee: 36th Report of Session 2017-19

Sections 1 and 4 of the report look at the EC "new deal for consumers" proposed legislation and green finance respectively and detail the latest ministerial responses to the Committee’s specific concerns (including with regard to Brexit). These matters are still under scrutiny by the Committee. The report can be accessed here.

The Friendly Societies (Amendment) (EU Exit) Regulations 2018 (Draft)

This SI amends the Friendly Societies Act 1992 (c.40) and the Friendly Societies (Accounts and Related Provisions) Regulations 1994/1983 in order to address failures of retained EU law to operate effectively and other deficiencies arising from Brexit. The SI can be accessed here.

BoE: Settlement Finality Directive

BoE has sent a "Dear CEO" letter aimed at EU systems designated under the Settlement Finality Directive. The letter can be accessed here.

HoL EU Select Committee/HoC European Scrutiny Committee: Scrutiny of documents

The chairs of the Committee have today written to Dominic Raab to ask for confirmation that the Government is willing to support the continued scrutiny of EU documents during the post-exit transition or implementation period. The letter can be accessed here.

EC: Striving for unity

This report sets out the work of the Council from May 2016 to June 2018. It includes a section on negotiating Brexit. The full report can be accessed here.

CMS RegZone publishes weekly updates (available via email, on-line and via Twitter) on Brexit developments for financial services firms. These provide analysis and commentary on significant developments during the week in question. A daily digest of Brexit news (without analysis or commentary) is also available by email here and online via the RZ news wizard here (both of these can be filtered using the Brexit topic). Links to publications are contained in each update; publications released before the updates commenced in April 2018 can be found in a bibliography here. CMS RegZone publication ‘Where we stand’ provides an overview of the current position in a single report; this is updated regularly to take account of the key developments from the weekly updates.

 


[1] Dual recognition coordination as explained in chapter 1 of the April 2017 Report. DRC is a broad term to cover a variety of techniques such as “mutual recognition”, “home state recognition/supervision”, “deference”, “substituted compliance” and “passporting”.

[2] Financial Services and Market Act 2000.

[3] European Market Infrastructure Regulation.