Brexit update for financial services firms - week ending 29 June 2018

United Kingdom

The week in outline:

The European Union (Withdrawal) Act 2018 (the ‘EU(W)Act’) received Royal Assent. HMT published an overview (document 2 below) which provides a summary of the legislative preparations on the UK side for a ‘no-deal’ scenario (under the EU(W)Act). These include the ‘no-deal scenario’ transitional measures which the UK has already announced on a unilateral basis - the temporary permission regime for incoming EEA firms. A publication from the EBA (document 1 below) maintains the harsher tone from the EU side, with no mention of any comparable transitional measures and greater pressure on firms to restructure for a ‘no-deal scenario’. HMT, on the other hand, says that ‘firms do not need to prepare now to implement onshoring changes’ for a no-deal scenario i.e. that firms can currently plan on the assumption that the proposed transitional period (under the draft Withdrawal Agreement) will take effect as planned. Any transitional measures for outgoing UK firms can only come from the EU/EU-27 but at present EU institutions seem more interested in maximising political pressure rather than mitigating ‘no-deal’ scenario risks. This places UK firms in a difficult position.

The UK is now embarking on a vast legislative program for a ‘no-deal’ scenario. This will be rolled out in the coming months; for financial services, HMT, BoE, PRA, FCA and PSR (the Payment Systems Regulator) will promulgate instruments to modify ‘retained EU law’ which is to be preserved and converted into domestic law under the EU(W)Act. This will cover secondary EU law - directly applicable legislation such as regulations (which will be converted) and domestic law which implements EU law such as directives (which will be maintained) – including tertiary EU law such as, in the field of FS, Commission Acts at level 2 and Binding Technical Standards (both RTS and ITS) at level 2.5. It will also cover the relevant parts of the UK regulators’ handbooks/rulebooks (i.e. those parts that reflect EU requirements). Extensive modifications (by way of statutory instruments (SIs) which are subject to the negative or affirmative approval procedure at Westminster) will be required to reflect the breakdown in dual regulation coordination (DRC) post-Brexit (in the no-deal scenario).[1] UK regulators will make the changes to their rulebooks (for a no-deal scenario) under the EU(W)Act procedures and will not be permitted to use their general rulemaking powers. Modification of FS retained EU law (other than rulebooks and BTS) will be led by HMT. Level 3 guidance issued by the ESAs (ESMA, EBA and EIOPA) is not onshored/ported across by the EU(W)Act; we understand that the UK regulators may simply use Q and As issued by the ESAs (which provide important guidance on EU FS law) as guidance without formally adopting the Q and As as their own. The task of modifying retained EU law, even in the narrow area of FS, is vast but HMT and the regulators are well advanced in their planning. HMT will start to lay FS SIs shortly.

HMT says that the existing UK regime for third countries would provide the basis for regulating EU firms doing business in the UK and for cooperation with EU/EU-27 regulators. The unilateral transitional arrangements for a no-deal scenario are an exception. These will comprise a Temporary Recognition Regime (for central counterparties) and a Temporary Permissions Regime (TPR) to enable EU firms to continue to operate in the UK for a fixed period post-Brexit (and to give them time to obtain UK authorisation) - despite the loss of passporting DRC. HMT also see the need to cover some firms outside the passporting regime and UK regulators will be given general powers to make transitional arrangements.

Whilst the vast legislative task of preparing for a no-deal scenario in FS is underway and planning is well understood, the UK’s legislative blueprint for the planned ‘deal’ scenario and the transitional period under the Withdrawal Agreement (WA) is still very unclear (as can be seen from the analysis under document 3 below – HoC Exiting the EU Committee). If and when the WA is agreed, HMG will bring forward fresh legislation – the Withdrawal Agreement and Implementation Bill (WAIB). It is not clear, however, how this legislation will implement the transitional period regime under the WA or how it will undo or defer the EU(W)Act regime (which may by then involve a vast amount of secondary legislation to modify retained EU law for a no deal scenario). EU law is to continue to operate in the UK during the transitional period– so this will conflict with the effect of the 'no-deal' changes under the EU(W)Act regime, such as the ending of CJEU jurisdiction, the changes to the supremacy of EU law, the removal of the ECA 1972 powers to implement new EU legislation by SI,the removal of the direct effect of new EU law, the domestication/onshoring ofretained EU law and the vast number of modifications by SI.

1. Opinion of the EBA on preparations for the withdrawal of the United Kingdom from the European Union

EBA's Opinion asks competent authorities to ensure that financial institutions take practical steps now to prepare for the possibility of a withdrawal of the UK from the EU with no ratified Withdrawal Agreement in place, and no transition period. The full opinion can be accessed here.

"The EBA has decided to issue this opinion at this time because:

a) progress in the preparations of financial institutions for the potential departure of the UK from the EU without a ratified withdrawal agreement in March 2019 is inadequate;

b) the recent political agreement on a transition period, while welcome, does not provide any legal certainty until a withdrawal agreement is ratified at the end of the process for the departure of the UK from the EU;

c) there remains a material possibility that, despite the best efforts of both sides to conclude a ratified withdrawal agreement, this may not be possible, in which case the UK would leave the EU on 30 March 2019 by operation of law without a transition period; and

d) the necessary mitigating actions take time, and should be pursued without further delay.”

“The EBA is cognisant that the necessary actions will entail costs; this is, however, an inevitable consequence of the departure of the UK from the EU. Financial stability should not be put at risk because financial institutions are trying to avoid costs. A ratified withdrawal agreement may provide all stakeholders with more time to implement the necessary changes, but, given the lack of certainty, mitigating actions need to start now if they have not already done so. Financial institutions, and their boards, have obligations to their shareholders and to their customers to take action in a timely manner. “

“To be adequately prepared, financial institutions should identify the risk channels (beyond the general risk of market turmoil) arising from the possible departure of the UK from the EU without a ratified withdrawal agreement in March 2019. In doing so, they should take into account the European Commission’s notices to stakeholders 16. This process should include, but not be limited to, identifying:

i. direct financial exposures to UK (for EU27 financial institutions) or EU27 (for UK financial institutions) counterparties;

ii. existing contracts with UK (for EU27 financial institutions) or EU27 (for UK financial institutions) counterparties;

iii. reliance on UK (for EU27 financial institutions) or EU27 (for UK financial institutions) financial market infrastructures (FMIs), including central counterparties (CCPs) and related ancillary services;

iv. the storage of data in, and transfer of data to, the UK (for EU27 financial institutions) or the EU27 (for UK financial institutions); and

v. reliance on funding markets in the UK (for EU27 financial institutions) – including for issuances of instruments eligible for minimum requirement for own funds and eligible liabilities (MREL) under UK law – or in the EU27 (for UK financial institutions).”

“To minimise any potential disruption arising from customer confusion, competent authorities should engage with financial institutions to ensure that they provide clear information to customers whose contracts or services may be affected, as soon as that information becomes available to them, and in any event no later than the end of 2018.”

2. HMT/FCA/BoE’s approach to the financial services legislation under the European Union (Withdrawal) Act

HMT's document sets out the government’s approach to bringing EU financial services legislation into domestic law under the EU (Withdrawal) Act. HMT states that it intends to lay the first financial services onshoring SIs soon, including with regard to the Temporary Permissions Regime, the Temporary Recognition Regime for central counterparties and the SI sub-delegating the power to fix deficiencies in EU binding technical standards and regulator rulebooks to the financial services regulators. Further SIs fixing deficiencies in EU legislation will be laid over the autumn into early 2019. HMT plans to lay these SIs in groups, with some of the first to be laid in the autumn which will cover significant files relating to prudential regulation and capital markets. HMT plans to publish drafts of these SIs and accompanying explanatory information over the summer, ahead of laying, to give stakeholders an opportunity to engage and familiarise themselves with the draft provisions. FCA and BoE have published press releases on their roles in preparing for Brexit. The HMT report can be accessed here, the FCA one here and the BoE one here


HM Treasury

“The EUWA repeals the European Communities Act 1972 and converts into UK domestic law the existing body of directly applicable EU law (including EU Regulations). It also preserves UK laws relating to EU membership – e.g. legislation implementing EU Directives. This body of law is referred to as “retained EU law”. The EUWA also gives ministers powers to prevent, remedy or mitigate any failure of EU law to operate effectively, or any other deficiency in retained EU law, through SIs. We sometimes refer to these contingency preparations for financial services legislation as ‘onshoring’. These SIs are not intended to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition to this situation. The scope of the power is drafted to reflect this purpose and is subject to further restrictions, such as the inability to use the power to impose or increase taxation, or establish a public authority. The power is also time-limited and falls away two years after exit day.”

In terms of onshoring there is also the important question of the split of responsibilities between HM Treasury and the financial services regulators. This has been discussed in one of our previous updates. However, the new HMT paper clarifies some additional points:

“In leaving the EU without a deal, many functions currently carried out at an EU level would cease to apply to the UK and would need to be provided for in the UK’s regulatory regime. HM Treasury’s onshoring work involves allocating these EU functions to the appropriate UK bodies. In this scenario, HM Treasury proposes to follow the model outlined in FSMA and allocate functions to UK regulators in a way which is consistent with the responsibilities already conferred on them by Parliament, thus providing certainty and continuity for firms.

[…] HM Treasury has confirmed that in this scenario it intends to transfer supervisory powers to the FCA to regulate credit ratings agencies and trade repositories currently supervised at the European level by the European Securities and Markets Authority (ESMA), and it intends to give functions and powers in relation to non-UK central counterparties and non-UK central securities depositories, also currently exercised by ESMA, to the Bank of England.”

“After exit, HM Treasury proposes that the regulators take on responsibility for maintaining BTS. Under this proposal, when one of the regulators proposes a change to BTS, HM Treasury will be required to approve the instrument that gives effect to the change. HM Treasury may not approve a proposed change to BTS if it appeared to the Treasury that the proposal would have implications for public funds or would prejudice negotiations for an international agreement.

Firm preparations

“The government is continuing this work to ensure that the UK will have a functioning legislative and regulatory framework in all scenarios. As part of this, HM Treasury intends to legislate to provide the financial services regulators with powers to introduce transitional measures that they could use to phase in any onshoring changes. This means that firms do not need to prepare now to implement onshoring changes in the event no deal is reached with the EU.

Firms should continue to plan on the assumption that an implementation period will be in place from 29 March 2019 – and, therefore, that they will be able to trade on the same terms that they do now until December 2020. They will need to comply with any new EU legislation that becomes applicable during this period.”

Temporary Permission Regime

“In the unlikely scenario that the UK leaves the EU without a deal, the UK would be outside the EU’s framework for financial services. The UK’s position in relation to the EU would be determined by the default Member State and EU rules that apply to third countries at the relevant time.”

“In light of this, our approach in this scenario cannot and does not rely on any new, specific arrangements being in place between the UK and the EU. As a general principle, the UK would also need to default to treating EU Member States largely as it does other third countries, although there are instances where we would need to diverge from this approach, including to provide for a smooth transition to the new circumstances. The principles that would lead to deviations from this approach are set out below. “

“For example, recognising the need to provide for continuity and to allow time to prepare for a smooth transition to the new regime, it would be appropriate for HM Treasury to introduce a Temporary Permissions Regime (TPR), in line with the announcement made in December 2017. To deal with the loss of their passporting rights on the UK’s exit from the EU without a negotiated agreement, the TPR would allow EEA firms to continue operating in the UK for a time-limited period after the UK has left the EU. For those firms wishing to maintain their UK business on a permanent basis, the regime would provide sufficient time to apply for full authorisation from UK regulators.

In addition to the TPR, HM Treasury intends to introduce further specific transitional regimes for entities operating cross-border and outside of the passporting framework. This is part of onshoring planning to maximise certainty and continuity for firms and consumers. HM Treasury is aware that firms would need time to adjust to this changed regulatory regime in the unlikely event it is needed, and therefore intends to provide the financial services regulators with a general power to phase in post-exit requirements allowing flexibility for firms to transition to a fully domestic UK regulatory framework.”

3. HoC Exiting the European Union Committee Parliamentary scrutiny and approval of the Withdrawal Agreement and negotiations on a future relationship

The Committee’s report maps out the steps ahead for Parliament and questions whether five months will be enough time for Government and Parliament to complete the necessary proceedings. The full report can be accessed here.

“We [the Committee] were told by DExEU Minister Steve Baker that it was not the purpose of the European Union (Withdrawal) Act to implement the transition/implementation period. The transition/implementation period, currently set out in green in the draft Withdrawal Agreement as being agreed in principle between the European Commission and the UK Government, provides that EU law will continue to be applicable to the UK. This brings into question the EU (Withdrawal) Act’s provisions both in Section 1 to repeal the European Communities Act 1972 (ECA), effectively ending the application of EU law on exit day, and in Section 6 which ends CJEU jurisdiction in the UK on exit day. The Government has not been clear on how it will deal with the contradictions between the commitments in the Withdrawal Agreement and the EU (Withdrawal) Act. It is not yet clear whether the EU (Withdrawal) Act will provide the foundations for the transition/implementation period, or whether it will be the WAIB alone, or a combination of the two.”

“The Institute for Government has argued that the Withdrawal Agreement and Implementation Bill (WAIB) can be expected to have three main parts:

  • First, it will give domestic legal effect to whatever transition/implementation period is agreed betweenthe UK and the EU. In effect, this part of the WAIB will mimic the EuropeanCommunities Act 1972. For instance, it will have to provide that EU law is enforceable in the UK during the transition/implementation period, and that any question as to the meaning ofEU law can be determinedby the European Court of Justice (CJEU) during that period.
  • Second, the WAIB will need to give effect to the agreement on citizens’ rights. The draft WithdrawalAgreement sets out the rights that EU citizens would enjoy in the UK after Brexit, andprovides thatthese would be made enforceable in UK law.
  • Third, the WAIB will need to lay the legal groundwork for other separation provisions to be dealt with.For example, if the Treasury needs a power to make payments in order to satisfy theUK’s obligations under the financial settlement in the Withdrawal Agreement, the WAIB will have to create that power.”

“According to the Institute for Government, the WAIB will raise testing constitutional questions, many of which could generate political opposition in Parliament. For example:

The WAIB cannot give legal effect to transition in the UK, for instance, without keeping in force or effectively replicating the European Communities Act 1972 for the duration of that transition. In addition, the Government’s promise, in text now agreed as part of the draft withdrawal agreement, to use this legislation to entrench EU citizens’ rights in domestic law, will be complex for parliamentary draftsmen to navigate. Because the UK Parliament is sovereign, entrenchment is difficult–any Parliament can, as a general rule, reverse what any previous Parliament has done.

There will be time constraints on the passage of the WAIB. The legislation cannot be written and introduced until the Withdrawal Agreement has been negotiated and then approved by Parliament. The Bill must then complete its passage through Parliament and receive Royal Assent by the date of the UK’s departure from the EU. Otherwise, the UK will leave the EU and be bound by the Withdrawal Agreement without the domestic legislation needed to implement that agreement. This would put the UK in breach of its obligations under international law. It would also create legal uncertainty for businesses and citizens who will be unsure whether the terms of the Withdrawal Agreement will apply to them or not. The European Union (Withdrawal) Bill took over 11 months to complete its parliamentary journey while, if negotiations go to plan and there is agreement at the October Council, the Government will have only five months (180 calendar days) to get the WAIB through Parliament.”

“It is likely that, to secure the legal basis necessary for the standstill transition/implementation period envisaged in the current text of the Withdrawal Agreement, the Withdrawal and Implementation Bill will need to restore (for the limited period of the transition/implementation period) provision for the direct effect of EU law which is to be removed by the European Union (Withdrawal) Act. We call on the Government to clarify the legal basis that will be used to provide for the standstill transition/implementation period. We also call on the Government to clarify how legal provision will be made for any backstop solution agreed for the Irish border and whether this backstop will need to be given provisional legal effect in the Withdrawal Agreement and Implementation Bill.”

Furthermore, as explained by Swee Leng Harris in a Hansard Society Paper there is the issue of the term “exit day” and its implication for the power of the ministers.

“The term ‘exit day’ presently serves four main functions in the EU (Withdrawal) Bill. It is the day:

  1. when the European Communities Act 1972 is repealed;
  2. when the snapshot of EU law is taken, and converted into ‘retained EU law’ in UK law;
  3. after which the CJEU ceases to have jurisdiction over the UK; and
  4. that marks the beginning of the sunset period for some delegated powers in the Bill (some powers are not subject to a sunset clause).”

“The sunset period for delegated powers would in effect be extended if the definition of exit day for the purposes of the EU (Withdrawal) Bill was changed to the end of the implementation / transition period as proposed by some amendments. So, for example, the power presently provided in clause 7 of the EU (Withdrawal) Bill to correct deficiencies in retained EU law would not be sunsetted until 31 December 2022, being two years after the agreed end of the implementation / transition period on 31 December 2020.”

Otherwise there is the issue that powers could effectively only be used for a very short period of time after the transition period (from 1 January 2021 to 29 March 2021).

Other publications from the RegZone Brexit news feed

PSR’s approach to financial services legislation under the European Union (Withdrawal) Act

PSR has published details of its approach of financial services legislation under the Act. The full article can be accessed here.

EIOPA: Opinion on disclosure of information to customers about the impact of the withdrawal of the UK from the EU

EIOPA's Opinion is addressed to national supervisory authorities and concerns the duty of insurance undertakings and insurance intermediaries to inform customers about the possible impact of Brexit and their requirement to ensure that insurance undertakings and insurance intermediaries take appropriate contingency measures to ensure the continuity of services for cross-border insurance contracts UK and the EU 27. An FAQ has been published alongside the Opinion. The full opinion can be accessed here and the FAQ here.

BoE Financial stability report

Amongst other matters, the report highlights FPC's concerns on Brexit, noting that it continues to judge that the UK banking system could support the real economy through a disorderly Brexit and is continuing to monitor preparations to mitigate disruption to financial services that could arise from Brexit. The full report can be accessed here.

EC: Opening of negotiations with WTO members on Brexit-related adjustments

The Council has authorised the Commission to open formal negotiations within the WTO on how to divide up existing EU tariff rate quotas between the EU27 and the UK. The full article can be accessed here.

Department for Exiting the EU: EU (Withdrawal) Bill

The EU (Withdrawal) Bill received Royal Assent on 26 June 2018. The Department for Exiting the EU notes that departments will now start to lay the relevant secondary legislation in Parliament. The full news item can be accessed here and the Act can be accessed here.

IUA: Brexit contract continuation clause

IUA has published a Brexit contract continuation clause that aims to clarify how firms will continue to pay claims despite any business disruption caused by a situation in which adequate transitional arrangements are not agreed. The full news item can be accessed here.

HoC European Scrutiny Committee: 32nd Report of Session 2017-19

Sections 1 and 6 of the report look at a proposed Directive on whistleblowing and a proposed Regulation on the mutual recognition of freezing and confiscation orders 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 full report can be accessed here.

HoC Public Accounts Committee: Exiting the EU: the financial settlement

The Committee's report concludes "there is much talk of an EU dividend but our work has highlighted a number of as yet uncertain costs. Any dividend will be hard to calculate and, if it materialises, is some years away". The full report can be accessed here.

HoC: Brexit and financial services

This HoC Library briefing paper brings together responses from financial organisations on the impact of Brexit. The full report can be accessed here.

EC: Article 50 conclusions

The Council adopted the following conclusions on 29 June 2018. The full document can be accessed here.

EC: Remarks by Donald Tusk following Council meeting of 28 June 2018

In addition to commenting on progress on the Banking Union, Donald Tusk notes that "on Brexit.…there is a great deal of work ahead, and the most difficult tasks are still unresolved. If we want to reach a deal in October we need quick progress. This is the last call to lay the cards on the table". Click here to access the full statement.

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]The conditions and procedures that need to be fulfilled in order to pass an SI under the EU(W)Act are set out in Schedule 7 of the Act.