Brexit update for financial services firms – week ending 20 July 2018

The week in outline:

Following the publication of the White Paper last week Her Majesty's Government’s preparations for Brexit continue. A number of draft Statutory Instruments (SIs) relating to financial services (FS) have been introduced under the European Union (Withdrawal) Act 2018 (see “other publications” below).

Most notable was the introduction of the draft Financial Regulators’ Powers (Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018. It defines the new powers of the UK regulators (FCA, PRA and BoE). In a letter to the Treasury Select Committee (TSC) Philip Hammond explains that "The Treasury proposes to allocate responsibility for these BTS [binding technical standards] to UK regulators, with that responsibility to be exercised in broadly the same way that UK regulators are already responsible for detailed domestic technical rules. Having played an important role in the EU to develop BTS, UK regulators have the necessary expertise and resource to maintain them.” He also notes that “When fixing BTS deficiencies to ensure that onshored BTS operate effectively from exit, Treasury is required to approve all of the instruments which will give effect to those fixes. Treasury ministers will be responsible for ensuring that the deficiency fixes are consistent with the amendments made to parent legislation, which Parliament will be asked to approve in SIs made under the EU (Withdrawal) Act.” Clearly defining the role of the UK regulators will be an important step when preparing for Brexit (see our update for the week ending 29 June 2018).

Of particular significance for incoming EEA firms was the publication of a transcript of the hearing held by the TSC with Sam Woods (chief executive, PRA) and other executives of the PRA and BoE where various aspects of Brexit were discussed. Most importantly they shone some light on their proposal for a temporary permissions regime. When asked whether the temporary permissions regime would last until the end of the transition period, Mr. Woods noted that “It will be slightly longer. It will be a three-year period starting from March of next year. The idea is to give three years from then for firms to get through the process with us, which we think will be entirely manageable.” He also notes “There is one other aspect of it, and this will all come to you for your views and hopefully agreement. Separately, where firms apply to us there is a statutory clock that starts ticking, which is six months or 12 months. As we sit here today, 45 firms out of the 160 have applied. We also need to stop that clock in order to give effect to that three-year period, so that is another part of it. Of all the mitigations that we have for cliff-edge risk and for basically managing the UK end of this in an orderly way, that is the most important.”

David Belsham (external member of the Prudential Regulation Committee) also noted that that the temporary permissions regime is also important for contract continuity “You have 10 million UK policyholders of EEA firms. At a stroke, the temporary permissions regime protects their interests. They can carry on paying premiums. They can carry on making claims. It is pretty central now to the way we are moving forward.”

In the current form the temporary permissions regime looks to be beneficial to UK consumers and EU/EEA firms. However, as has been stressed at the hearing, so far the EU has not introduced a temporary permissions regime for UK firms acting in the EU/EEA (see our update for the week ending 29 June 2018).

There is also no mention of a temporary permissions regime in the European Commission’s (EC) publication “Preparing for the Withdrawal of the UK from the EU”. The European Commission, when defining the actions that will be taken, distinguishes between “preparedness”, which are measures that will be taken whether or not there is a Withdrawal Agreement with the UK, and "contingency", which are measures that will only be taken if there is no Withdrawal Agreement. The communication also notes: “Given the potential implications for financial stability, a technical working group, co-chaired by the Bank of England and the European Central Bank, has been set up and is meeting regularly with a focus on risk management in the period around 30 March 2019 in the area of financial services.” The European institutions still put the onus on the firms to prepare for Brexit, which reflects the view expressed by the EBA (for more commentary on this point see our update for the week ending 29 June 2018).

1. HMT: Proposed division of responsibility for EU financial services post-brexit

TSC has now published a letter from Philip Hammond dated 9 July 2018 regarding the onshoring of EU financial services regulation. The letter can be accessed here.

“Underneath EU Level 1 legislation, there is a large body of EU technical rules known as Binding Technical Standards (BTS). As set out in EU legislation, these BTS are “technical” and “shall not imply strategy decisions or policy choices”. The Treasury proposes to allocate responsibility for these BTS to UK regulators, with that responsibility to be exercised in broadly the same way that UK regulators are already responsible for detailed domestic technical rules. Having played an important role in the EU to develop BTS, UK regulators have the necessary expertise and resource to maintain them.”

“It is of course right that the UK regulators take on responsibility for correcting and maintaining BTS in a way which is consistent with the policy direction set by the Treasury and Parliament. The following constraints will therefore apply to the regulators’ exercise of this responsibility.

• When fixing BTS deficiencies to ensure that onshored BTS operate effectively from exit, Treasury is required to approve all of the instruments which will give effect to those fixes. Treasury ministers will be responsible for ensuring that the deficiency fixes are consistent with the amendments made to parent legislation, which Parliament will be asked to approve in SIs made under the EU (Withdrawal) Act.
• The regulators plan to conduct public consultations on their proposed deficiency fixes and the consultation process should begin in the autumn, subject to Parliament approving the regulators having responsibility for this task. As well as giving industry an opportunity to express views on the proposed BTS amendments, the regulators consultation documents will be available to relevant Parliamentary committees, including the Treasury Select Committee, to give these committees an opportunity to engage with proposed deficiency fixes, should they wish to do so.
• In the affirmative SIs that Treasury will be laying under the EU (Withdrawal) Act, Parliament will be asked to approve each of the specific and limited purposes for which the regulators will take on responsibility for BTS. The regulators will only be able to take on responsibility for a specific technical standard if Parliament approves it. The regulators will not be able to make or amend BTS in areas that Parliament has not specifically approved.
• If the regulators propose a change to BTS after exit which appears to the Treasury to have implications for public funds, or which appears to the Treasury to prejudice the negotiation of any international agreement on financial services, including negotiations with the EU, the Treasury will have the ability to veto such a proposal. Parliament will of course be able to hold minsters accountable for how this veto is exercised.
• The scrutiny of the regulators’ work by the Treasury Select Committee is integral to the regulators’ accountability and transparency. This will of course apply to the functions being conferred on them in relation to BTS.”

2. TSC: The work of the PRA

A transcript of the hearing held on 11 July 2018 follows, which was attended by Sam Woods and other executives from PRA and BoE. Various aspects of Brexit were discussed, including contract continuity. The full transcript can be accessed here.

“Sam Woods: I am very glad you begin with that, because that temporary permissions regime is massively more opportunity than threat from the PRA’s point of view. Indeed, I would describe it as the lynchpin of our planning for what we think of as the inbound firms. If I may just give a bit of colour on that, we have 160 firms here from the EU 27 that will need to be authorised to carry on operating, and we have taken the view that to try to do that at warp speed by March of next year would be very unwise. It would require us to drop all sorts of other things. It would also be very difficult for the firms.”

“Chair:It is just for the implementation period, is it, so up to December 2020?

Sam Woods: It will be slightly longer. It will be a three-year period starting from March of next year. The idea is to give three years from then for firms to get through the process with us, which we think will be entirely manageable. There is one other aspect of it, and this will all come to you for your views and hopefully agreement. Separately, where firms apply to us there is a statutory clock that starts ticking, which is six months or 12 months. As we sit here today, 45 firms out of the 160 have applied. We also need to stop that clock in order to give effect to that three-year period, so that is another part of it. Of all the mitigations that we have for cliff-edge risk and for basically managing the UK end of this in an orderly way, that is the most important.”

“David Belsham: Yes. Generally, as Sam says, this is a necessary thing for us. It is a backstop on our whole plan of how we are approaching the authorisations. It is also relevant to contract continuity. You have 10 million UK policyholders of EEA firms. At a stroke, the temporary permissions regime protects their interests. They can carry on paying premiums. They can carry on making claims. It is pretty central now to the way we are moving forward.”

3. EC: Preparing for the withdrawal of the UK from the EU

The EC has adopted a Communication outlining the ongoing work on the preparation for all outcomes of Brexit that calls on Member States and private parties to step up preparations. It notes "preparing for the UK becoming a third country is of paramount importance, even in the case of a deal between the EU and the UK". The Communication may be found via the following link.

“When defining the actions that will have to be taken, the Commission distinguishes between two different kinds of measures: preparedness measures and contingency planning.”

“Preparedness measures are measures that will have to be taken as a consequence of the withdrawal of the United Kingdom, regardless of whether there will be a withdrawal agreement with the United Kingdom or not.”

“Contingency planning consists of envisaging the measures that would be necessary to mitigate the effects of a withdrawal of the United Kingdom from the Union without a withdrawal agreement, and hence without a transition period, which would inevitably arise around the date of withdrawal (30 March 2019).”

“Passporting rights will cease to exist after withdrawal. […] There will be no Single Market access. Operators in all financial services sectors need to prepare for this scenario if they wish to ensure that there is no disruption in their current business model and that they are in a position to continue serving their clients. In relation to contracts, at this juncture, there does not appear to be an issue of a general nature linked to contract continuity as in principle, even after withdrawal, the performance of existing obligations can continue. However every type of contract needs to be looked at separately.”

“Given the potential implications for financial stability, a technical working group, co-chaired by the Bank of England and the European Central Bank, has been set up and is meeting regularly with a focus on risk management in the period around 30 March 2019 in the area of financial services. Additional authorities are participating in analysis on an issue-specific basis. The group will report on its work to the Commission and the responsible authority in the United Kingdom.”

Other publications from the RegZone Brexit news feed

BoE/FCA/PRA/PSR: Payment services MoU

The authorities have undertaken a review of the MoU and have concluded that cooperation and coordination under the MoU is working well, but have identified a number of areas to further deepen cooperation and coordination which will be implemented over the coming year. The MoU will be reviewed again over the next year to ensure it continues to appropriately reflect respective roles and responsibilities once the UK has left the EU. The report can be accessed here.

FCA: Annual Report & Accounts 2017/18

FCA has published its Annual Report, highlighting its work on preparations for Brexit; MiFID II; PSD2; the extension of SM&CR; high-cost credit and PPI. FCA will hold its Annual Public Meeting on 11 September 2018. Alongside the main report, FCA has also published individual reports on enforcement, competition, money laundering and diversity. The report can be accessed here.

HoL Secondary Legislation Scrutiny Committee: Sifting “proposed negative instruments” laid under the European Union (Withdrawal) Act 2018

This report sets out criteria and working arrangements. The report can be accessed here.

TSC: Bank of England stability reports

A transcript of the hearing held on 17 July 2018 follows, which was attended by members of the FPC. Specific topics include: Brexit; stress tests and cyber resilience. The transcript can be accessed here.

TSC: Consequences of "no deal" Brexit

TSC has written to Philip Hammond to make further information available on the consequences of a "no deal" Brexit, and the Government’s preparations. The letter can be accessed here.

PMO: Speech by Theresa May

Text of the speech given by Theresa May on 20 July 2018 on aspects of Brexit follows. The text can be accessed here.

EC: Statement by Michel Barnier

Text of the statement given on 20 July 2018 by Michel Barnier follows. The text can be accessed here.

FCA: Speech by Nausicaa Delfas: The FCA’s approach to Brexit: our preparations and our vision for the future

Text of this speech, given on 19 July 2018 follows. Specific areas covered include contract continuity; the legal and regulatory framework; temporary permissions regime and FCA’s vision for the future: The speech can be accessed here.

FCA: Analysis of the impact of the Withdrawal Agreement and future framework with the EU on FCA’s ability to meet its objectives

TSC has published a letter from FCA confirming the regulator's commitment to publish an analysis of the impact of the Withdrawal Agreement and future framework with the EU on the FCA’s ability to meet its objectives. The letter can be accessed here.

EC: Preparing for the withdrawal of the UK from the EU on 30 March 2019

The EC has adopted a Communication outlining the ongoing work on the preparation for all outcomes of Brexit that calls on Member States and private parties to step up preparations. It notes "preparing for the UK becoming a third country is of paramount importance, even in the case of a deal between the EU and the UK". The Communication may be found via the following link.

HMT: Proposed Crowdfunding Regulation

HMT has published a letter sent to HoL EU Committee with regard to the proposed Crowdfunding Regulation/amendment to MiFID II which sets out the Government's views on the Regulation and notes concerns with regard to implications relating to third country status. The letter can be accessed here.

HoL: Brexit preparations and negotiations

This HoL library briefing has been prepared in advance of the debate due to take place on 23 July 2018 on a motion moved by Lord Callanan, Minister of State at the Department for Exiting the European Union, “that this House takes note of the preparations and negotiations connected with the United Kingdom’s departure from the European Union”. The briefing paper can be accessed here.

HoC: Future relationship between the UK and the EU

The Hansard transcript of the debate on 18 July 2018 follows. The transcript can be accessed here.

HoC: EU Financial Affairs Sub-Committee: EIB

The Committee has launched an inquiry into the UK's post-Brexit relationship with EIB and is requesting responses to a call for evidence (to be received by 14 September 2018). The letter can be accessed here.

FCA: Preparing your firm for Brexit

FCA's webpage sets out information for solo regulated firms to consider if or how they will be affected and what action they may need to take in relation to Brexit. The website can be accessed here.

ESMA: Guidelines on the application of the endorsement regime under Article 4(3) of the Credit Rating Agencies Regulation

In order to ensure that third-country credit ratings meet requirements which are at least as stringent as those set out in the Regulation, ESMA has published this supplementary guidance which enters into force on 1 January 2019. The guideline can be accessed here.

TSC/International Trade Committee: Trade Bill and the Customs (Cross-Border Taxation) Bill

This is a joint letter from the Committees which sets out themes arising from evidence heard in a joint session in April 2018 on the economic effect of trade policy. The letter can be accessed here.

The Financial Regulators’ Powers (Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018 (Draft)

The SI amends FSMA and the Banking Reform Act in order to ensure that legislation continues to operate effectively at the point at which the UK leaves the EU. The draft SI can be accessed here.

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

This instrument amends the Friendly Societies Act 1992 (C40) and the Friendly Societies (Accounts and Related Provisions) Regulations 1994/1983 in order to ensure that the legislation continues to operate effectively at the point at which the UK leaves the EU. The draft SI can be accessed here.

The Consumer Credit (Amendment) (EU Exit) Regulations 2018 (Draft)

This SI amends the Consumer Credit Act 1974, the Consumer Credit (Disclosure of Information) Regulations 2010/1013, the Consumer Credit (Green Deal) Regulations 2012/2798 and the Financial Services Act 2012 (Consumer Credit) Order 2013/1882 in order to ensure that the legislation continues to operate effectively at the point at which the UK leaves the EU. The draft SI can be accessed here.

The European Union (Definition of Treaties Orders) (Revocation) (EU Exit) Regulations 2018 (Draft)

The purpose of this SI is to revoke the totality of Specification Orders on exit day which will become redundant in consequence of the repeal of the European Communities Act 1972 (C68). The draft SI can be accessed here.

HoC: Brexit – customs and regulatory arrangements

This paper considers the proposals the UK Government has made to satisfy the simultaneous objectives to leave the EU Customs Union,... but have a cooperative ‘customs arrangement’ following Brexit; and to leave the Single Market, but maintain trade that is ‘as frictionless as possible’ following Brexit. It is noted that this report has not been fully revised following last week's White Paper. The full paper can be accessed here.

FCA: Board minutes

FCA has now published its Board minutes for the 23/24 May 2018 meeting. Topics include: high-cost credit review; FCA's Annual... Report; sovereign controlled companies and Handbook rule change reprioritisation in relation to Brexit. The full minutes 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.