Brexit update for financial services firms - week ending 11 January 2019

15/01/2019

1. EC: PRUDENTIAL REQUIREMENTS OF INVESTMENT FIRMS

The Council's position on the proposed Regulation and Directive has been endorsed. It is noted that the Council text further strengthens the equivalence regime, as set out in MIFID/MIFIR, that would apply to third country investment firms and sets out in greater detail some of the requirements for giving them access to the single market and grants additional powers to the EC where the activities performed by third country firms are likely to be of systemic importance. The publication can be accessed here“Until now, all investment firms have been subject to the same capital, liquidity and risk management rules as banks. The capital requirements regulation and directive (CRR/CRD4) are based on international standards intended for banks. They do not therefore fully take into account the specificities of investment firms.

On the basis of the text agreed today, investment firms would be subject to the same key measures, in particular as regards capital holdings, reporting, corporate governance and remuneration, but the set of requirements they would need to apply would be differentiated according to their size, nature and complexity.

The largest firms ("class 1") would be subject to the full banking prudential regime and would be supervised as credit institutions: Investment firms that provide "bank-like" services, such as dealing on own account or underwriting financial instruments, and whose consolidated assets exceed EUR 15 billion would automatically be subject to CRR/CRD4; Investment firms engaged in "bank-like" activities with consolidated assets between EUR 5 and 15 billion could be requested to apply CRR/CRD4 by their supervisory authority, in particular if the firm's size or activities would involve risks to financial stability. Smaller firms that are not considered systemic would enjoy a new bespoke regime with dedicated prudential requirements. These would, in general, be different from those applicable to banks, but competent authorities could continue applying banking requirements to certain firms, on a case by case basis, to avoid disrupting their business models. The text also provides for a 5year transitional period to give companies enough time to adapt to the new regime.

The Council text further strengthens the equivalence regime, as set out in MIFID2/MIFIR, that would apply to third country investment firms. It sets out in greater detail some of the requirements for giving them access to the single market and grants additional powers to the Commission. In particular, in case the activities performed by third country firms are likely to be of systemic importance, it allows the Commission to apply some specific operational conditions to an equivalence decision to ensure that ESMA and national competent authorities have the necessary tools to prevent regulatory arbitrage and monitor the activities of third country firms.”

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2. FCA: CP19/2: BREXIT AND CONTRACTUAL CONTINUITY

This CP sets out details of the financial services contracts regime, which allows EEA firms to run off their regulated business in the UK, if the UK leaves the EU without an implementation period, and proposes rules to apply to firms during the regime. Responses are required by 29 January 2019. The consultation paper can be accessed here.

“To further reduce the risk of harm associated with an abrupt loss of permission on exit day, the Government have published draft legislation (the FSCR Regulations). This ensures that firms can still fulfil their existing contractual obligations in the UK for a limited period of time, even if they are outside the TPR following the UK’s withdrawal from the EU.

[…]

This CP should be read alongside the FSCR Regulations.

[…]

The FSCR Regulations will allow EEA firms that have pre-existing contracts in the UK which would require a permission to service to continue to carry on the relevant regulated activities in the UK for a limited period while in the FSCR. We must amend our Handbook to apply appropriate rules to firms in the FSCR for this UK business. We are consulting on the application of these rules in this CP.”


3. FCA: CP19/1: RECOVERING THE COSTS OF REGULATING SECURITISATION REPOSITORIES AFTER THE UK LEAVES THE EU

The CP sets out FCA's proposals for recovering the costs of regulation from securitisation repositories post-Brexit. FCA notes that it will communicate separately on authorisation and supervision of securitisation repositories shortly. Responses are required by 11 February 2019. The consultation can be accessed here.

“FSMA allows us to raise fees to recover our costs and our FEES manual sets out the detailed framework for calculating and collecting fees. ESMA’s fee-raising powers are set out in delegated regulations. The appropriate regulation has not yet been introduced for SRs’ fees and so our understanding of the likely fees structure is based on the technical advice ESMA gave the EU Commission in October 2018. We do not need to replicate their requirements because we propose to apply the standard provisions of our FEES manual to SRs. However, to maintain continuity and minimise disruption for the firms, which may continue to operate in the EU and be regulated by ESMA, we have tried to minimise divergence from ESMA’s proposed fees structure. Where we do diverge, we explain the reasons.”

4. FCA/PRA: TEMPORARY PERMISSIONS REGIME

FCA’s press release advises that the notification window for the temporary permissions regime is now open and sets out links to other pages and documents for firms (including a section specific to fund managers). PRA has published a note on the application of SM&CR to firms in the temporary permissions regime, including FAQs on how the two sets of proposals in PRA’s CP26/18 and FCA’s CP18/29 would apply to EEA branches. The FCA press release can be accessed here and the PRA note here.

“Firms will need to notify us that they wish to enter the temporary permissions regime using our Connect system. Fund managers will also need to notify us of which of their passported funds they wish to continue to market in the UK temporarily via Connect.

The notification window opens today (7 January 2019) and closes at the end of 28 March 2019. We have also published a guide for Connect covering the notification process for firms (PDF) and investment funds (PDF).

There will be no fee for notifying for the regime and firms and fund managers should not wait for confirmation of whether there will be an implementation period before they submit their notification.

Firms that have not submitted a notification will not be able to use the regime.

Firms that do not notify us that they wish to use the temporary permissions regime will, where they meet the relevant conditions, be subject to the financial services contracts regime. We expect to consult on our approach to this regime shortly.

Once the notification window has closed, fund managers that have not submitted a notification for a fund will be unable to use the temporary permissions marketing regime for that fund. They will not be able to continue marketing that fund in the UK on the same basis as they did before exit day. The only exception to this is for new sub-funds of EEA UCITS that are in the temporary permissions marketing regime on exit day. It is possible for such new sub-funds to enter the temporary permissions marketing regime after exit day.”

5. FCA: ADVANCE APPLICATIONS FOR CREDIT RATING AGENCIES AND TRADE REPOSITORIES

FCA's press release notes that it has now opened applications for credit ratings agencies and trade repositories looking to offer services in the UK after 29 March 2019. In addition, EEA data reporting services providers authorised under MIFID should notify FCA if that they wish to provide data reporting services in the UK after exit day by 15 February 2019. The publication can be accessed here.

“We are continuing to prepare for a range of scenarios in relation to Brexit, including one in which the UK leaves the EU without a deal and without entering an implementation period.

In line with this, we have now opened advance applications from credit rating agencies (CRAs) and trade repositories (TRs) looking to offer services in the UK after 29 March 2019. CRAs and TRs looking to register a new UK entity or convert their ESMA registration into an FCA registration can find information on how to submit an advance application on our CRA and TR webpages.

Additionally, the window is now open for EEA data reporting services providers (DRSPs) authorised under MIFID to let us know that they wish to provide data reporting services in the UK after exit day. EEA DRSPs should notify us by 15 February 2019 and can find more information on how to notify us on the EEA DRSP webpages.”

6. HMT: DRAFT BENCHMARKS (AMENDMENT AND TRANSITIONAL PROVISION) (EU EXIT) REGULATIONS 2019

HMT has published the text of a draft SI, which will make amendments to retained EU law related to financial benchmarks, to be laid under the EU (Withdrawal) Act. The draft SI can be accessed here and the explanatory notes here.

This SI will make amendments to retained EU law related to the BMR to ensure that it continues to operate effectively in the UK once the UK has left the EU.

UK-located benchmark administrators seeking authorisation or registration will continue to apply to the FCA. However, this SI:

  1. Clarifies that the scope of the onshored Regulation (and thus of authorisation or registration by the FCA) is the UK, and not the whole of the EU; and
  2. Ensures that EU located administrators are subject to the onshored third country regime, which requires third country administrators or benchmarks to become approved via recognition or endorsement applications to the FCA to allow use of their benchmarks in the UK by supervised entities (unless and until an equivalence determination is made).

7. HMT: DRAFT PUBLIC RECORD, DISCLOSURE OF INFORMATION AND CO-OPERATION (FINANCIAL SERVICES) (AMENDMENT) (EU EXIT) REGULATIONS 2019

HMT has published the draft text of a SI, which will make amendments to domestic legislation and retained EU law related to the framework for the disclosure of confidential information, to be laid under the EU (Withdrawal) Act 2018, along with an explanatory note. The draft SI can be accessed here and the explanatory notes here.

“In a no deal scenario, the UK would fall outside the EU’s common regulatory and supervisory framework for financial services. Given that many of the provisions in the existing domestic legislation assume that the UK is a member of the EU’s single market for financial services, parts of the Disclosure Regulations will become deficient when the UK withdraws from the EU. In particular, failure to amend the Disclosure Regulations would mean that the UK would continue to afford additional protections that only apply to EEA member states, which would be inappropriate once the UK is no longer part of the EU’s common regulatory and supervisory framework.

This SI does not intend to make substantive policy changes, but addresses these deficiencies to ensure that the legislation continues to operate effectively at the point of exit, and to reflect the UK’s new position outside the EU. Importantly, changes introduced by this SI will ensure that the UK continues to have robust protections for how the UK’s financial services regulators disclose confidential information with other regulatory and supervisory authorities.”


Other publications from the RegZone Brexit news feed

HoL: Legislation to enable a further referendum on Brexit

This HoL library briefing pack contains a selection of material relevant for the forthcoming question for short debate on what legislation is necessary to enable a further referendum. The publication can be accessed here.


HoC: Brexit timeline: events leading to the UK’s exit from the EU

An updated HoC library briefing, which provides a timeline of the major events leading up to the referendum and subsequent dates of note. The briefing paper can be accessed here.

The Protocol 1 to the EEA Agreement (Amendment) (EU Exit) Regulations 2018

This SI has been laid before Parliament under the negative procedure. The draft SI can be accessed here.

FCA: Sector views

FCA has published its annual document which provides an overall view of how the regulated market is performing based on the data available and the regulator's views at mid-2018. The market is grouped under seven sectors (retail banking; retail lending; GI and protection; pensions and retirement income; retail investments; investment management and wholesale financial markets). FCA particularly considers the potential impact of Brexit, fintech and the financial needs of different generations. The full report can be accessed here.

The Packaged Retail and Insurance-based Investment Products (Amendment) (EU Exit) Regulations 2019

Draft Regulations laid before Parliament under paragraph 1(1) of the Schedule 7 to the European Union (Withdrawal) Act 2018, for approval by resolution of each House of Parliament. The draft SI can be accessed here.

HoL Secondary Legislation Scrutiny Committee (Sub-Committee A): Proposed negative SIs under the European Union (Withdrawal) Act 2018

The report considers a number of SIs, including the Draft Credit Rating Agencies (Amendment, etc.) (EU Exit) Regulations 2019, which is drawn to the "special attention of the House". It discusses the impact assessments accompanying the SI and to nine other instruments that address deficiencies in UK law and retained EU law relating to financial services regulation that arise from Brexit. The full report can be accessed here.


UK Finance: SEPA

UK Finance has formally made an application to EPC on behalf of the UK to remain in SEPA post-Brexit. A decision by EPC is expected to be made at its 7 March 2019 board meeting. The full statement can be accessed here.

TSC: Government response to Withdrawal Agreement report

TSC has published the text of a letter from Philip Hammond in response to TSC's December report, commenting that "when MPs do eventually come to vote on the Withdrawal Agreement next week, we will be doing so without all the facts". The response can be accessed here.


HMT: Banking, insurance and other financial services if there’s no Brexit deal

HMT has published updated guidance published providing information for UK residents, businesses, people living in the EEA and financial institutions. The guidance can be accessed here.


The Solvency 2 and Insurance (Amendment, etc.) (EU Exit) Regulations 2019

Draft Regulations laid before Parliament under paragraph 1(1) of Schedule 7 to the European Union (Withdrawal) Act 2018, for approval by resolution of each House of Parliament. The draft Si can be accessed here.

HMT: ESFS

Text of a letter from John Glen to the HoL European Scrutiny Committee on the European System of Financial Supervision proposal follows. Specific areas covered include: AML amendments and the role of the ESAs. The letter 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.