Brexit update for financial services firms - week ending 24 August 2018

Department for Exiting the European Union: Framework for the UK-EU Partnership: Financial Services (Document 1)

The Department for Exiting the EU has now published this presentation (dated 25 July 2018). The slides can be accessed here.

“Once the UK leaves the EU, we will maintain strong and appropriate regulation of our sector, given the exposure of our economy to the fiscal risk it represents.

The UK hosts the world’s most significant financial centre, with markets and products that are often very different from what is found elsewhere in the EU.

These differences mean that ruletaking – in the sense of an open ended commitment to adopt rules without having influenced their formation – will simply not work for this sector

It is important to find a mutually acceptable solution that encourages us to work together constructively, protecting financial stability, and respecting the principle of autonomous decision-making”

Equivalence at the outset

• UK and EU start with the same rulebook and entwined supervision
• Initial reciprocal recognition agreed for all third country regimes

Expanded scope of activities permitted cross-border

• Currently not sufficient for the breadth of interconnectedness between our markets
• Prioritising the most mutually beneficial activities for the economy, ensuring no unintended consequences or arbitrage

Common principles

• Agree common principles for the governance of our relationship
• Include commitments to global norms, and that equivalence is an evidence-based judgement on the equivalence of outcomes

Regulatory & supervisory cooperation

• Formalised regulatory and supervisory cooperation. Encourages: <br/>Regulatory coherence<br/>Effective market surveillance <br/>Effective cooperation (including in crisis)

Structure withdrawal

• Consultation and discussion before loss of access to either market
• Ability to try and find solutions
• Clear timelines and notice-periods
• Time for businesses and supervisors to adapt to change on either side
• Address acquired rights, safeguarding existing obligations to customers if equivalence is withdrawn

Bilateral agreement would include commitments and processes – ensuring transparency, stability and promoting cooperation

Autonomous: Access to market

“Each side’s legislative process and rulemaking would be autonomous, where each of us are answerable to our respective political and judicial frameworks

The criteria for determining if a foreign jurisdiction has equivalent standards and supervision for a given sector would be autonomous

The decision to grant or withdraw equivalence would be an autonomous judgement

There would be no recourse to the EU/UK Dispute Resolution Mechanism for autonomous matters – only for commitments included in the bilateral, Treaty-based agreement”

…with bilateral Treaty-based commitments to provide certainty and stability, not provided for under existing EU equivalence regimes

“Managing the scale of financial services activity occurring in both directions as part of a productive and efficient European market will inevitably demand bilateral engagement. A structure is needed to provide greater clarity about how we will work together.

There are gaps in coverage of the existing third country regimes. For example, there is no third country equivalence regime to support the rights of around 7,000 EEA domiciled funds to market to UK retail customers, who operate under the passport today.

Supervisory cooperation should reflect the level of integration between the UK and EU and provide a clear legal framework which covers micro- and macro- prudential supervision and crisis management. Reliance on informal MoUs would inevitably leave gaps in the oversight of micro and macroprudential risk, while uncoordinated decision-making could lead to conflicting or unenforceable decisions.

Cross-sectoral structured consultation and dialogue on the evolution of rules is essential if we are to maintain compatible regulation across the very broad spectrum of activity taking place. This is not provided for under existing equivalence frameworks.”

“The impossibility of acting unilaterally in relation to major firms and jurisdictions is already well-evidenced – as demonstrated by the EU and US taking decisions together in practice about access to each other’s markets for clearing services, delivered through coordinated announcements.”

“Clarifying and formalising the process of managing cross-border regulation and market access will not limit either Party’s judgement or flexibility, but rather will create greater confidence in and predictability of the process for affected firms and supervisors.”

“We are not proposing an expansion of the third country equivalence regime to all the areas covered by the passport. Instead, we propose that the scope of the relationship should be defined appropriately in relation to mutually economically beneficial global market activity.”

“Guarantees around cooperation, oversight and onsite inspections – which may be difficult for the EU to impose on all third countries without affecting wider EU/third country relationships and “moving the goalposts” for everyone”

HMT: No-Deal planning: Banking, Insurance and other Financial Services/Brexit planning and Analysis (Document 2)

The technical note for banking, insurance and other financial services has been published, which sets out implications for individuals and business customers of UK-based providers, UK-based customers of EEA firms operating in the UK and EEA customers (including UK citizens living abroad) of UK firms operating in the EEA; for financial services firms and funds and FMI. Separately, Philip Hammond has published his response to the TSC request for information on the Government's no-deal Brexit planning and analysis. The guidance can be accessed here and the letter can be accessed here.

In the guidance the following commitments have been made:

“The government will also be bringing forward legislation to deliver transitional arrangements for:

• Central Securities Depositories
• Credit Rating Agencies
• Trade Repositories
• Data Reporting Service Providers
• Systems currently under the Settlement Finality Directive
• Depositaries for authorised funds.”

ECB: Euromoney interview with Ignazio Angeloni (Document 3)

ECB has now published the text of an interview with Ignazio Angeloni. Topics include: Brexit and the SSM and governance issues in the banking sector. The interview can be accessed here.

“For the incoming banks, i.e. those relocating from the United Kingdom to the euro area, the key thing for us is to ensure that they put in place all the structures that are needed to conduct sound banking here. Establishing a legal entity on the continent cannot merely be a formality. They have to have a real structure here; have full control over and responsibility for the business they do; and have the necessary prudential safeguards, as well as high-quality staff, internal controls, risk management, and so on. That’s very important for us, and most of the incoming banks have now understood this need and incorporated it in their plans.

The story is different for the outgoing banks, i.e. euro area banks that access the UK market. Often, they work through branches, some of which are very large. Establishment or restructuring plans have to be authorised by the Prudential Regulation Authority. Our main concern here is “back-branching”, i.e. using a remote branch across the Channel as a springboard to do business in the EU, thus evading supervisory control. We want banks to use branches in the United Kingdom to conduct business in the United Kingdom.”

ECB: The review of prudential treatment of investment firms (Document 4)

ECB has published an Opinion, including proposed changes to the EC draft Regulation. Specific areas commented on include: classification of investment firms; authorisation and provision of services by third country firms. The opinion can be accessed here.

The opinion comments on the Commission’s proposal to strengthen and further harmonise the MiFID II legislation applicable to branches of 3rd country investment firms. It is suggesting further steps in the development of the 3rd country/equivalence regimes (for further commentary see our update of the week ending 22 June 2018).

Other publications from the RegZone Brexit news feed

Department for Exiting the EU: Article 50 talks

Talks will be held in Brussels on 21-22 August 2018. The agenda can be accessed here.

Department for Exiting the EU: Framework for the UK-EU partnership: open and fair competition

The Department for Exiting the EU has now published this presentation (dated 25 July 2018). The slides can be accessed here.

EC: Statement by Michel Barnier

Michel Barnier's statement following his 21 August 2018 meeting with Dominic Raab, which notes that the EU and UK "agreed that the EU and the UK will negotiate continuously from now on", follows. The full statement can be accessed here.

HMT: Draft Capital Requirements (Amendment) (EU Exit) Regulations 2018

This SI will make amendments to retained EU law, and existing UK law, related to capital requirements to ensure that it continues to operate effectively in a UK context once the UK leaves the EU, in any scenario. An explanatory policy note has also been published. HMT intends to lay this SI before Parliament in the autumn. The draft can be accessed here.

Department for Exiting the EU: No-deal planning

The Department for Exiting the EU and other Government departments have published the first batch of technical notes in relation to no-deal planning. The text of Dominic Raab's introductory speech and a general guidance note follow. The guidance can be accessed here, the speech can be accessed here.

DBEIS: No-deal planning – state aid

The technical note for state aid has been published, which states that, in the case of no-deal, CMA will take over state aid regulation within the UK immediately. The new regime would apply to all businesses with operations in the UK. The note can be accessed here.

European Parliament: Covered bonds

The European Parliament has published a draft report on the proposal for a covered bond regulation (that would amend CRR). The draft can be accessed here.

HoC: Brexit and financial services

An updated version of this HoC Library briefing (including a synopsis of the 23 August 2018 financial services technical note) follows. The 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.