Westminster politics continued to dominate the news in the run up to the holiday period. This update lists over 30 Brexit related publications relevant to financial services (FS).
No deal preparations. The European Commission published a ‘contingency plan’ and related Q&A for a no-deal Brexit – see Documents 1 and 2 below. The EU is maintaining its hard-line approach to temporary/transitional relief with minimal measures and only where required in the interests of the EU-27. In FS, the contingency plan only repeats the 4 measures which have already been proposed by ESMA – see our updates for the weeks ending 9 November, 16 November, 30 November and 7 December, , and the EU section at the end of our no deal database here. (See also the further proposal from ESMA at Document 5 below and the HoC European Security Committee report)
There was further progress in the UK’s no deal preparations for FS - see, for example, Documents 3 and 4 and 7 to 15 below. The latest position on no deal legislation in FS is set out in our no-deal database here. The Protocol 1 to the EEA Agreement (Amendment) (EU Exit) Regulations 2018’ (see Document 7 below) deals with the EEA dimension to the NtA process. Retained direct EU law will thus reflect the EEA dimension. Documents 3 and 4 relate to the Financial Services Contracts Regime (FSCR) which provides a run-off mechanism to enable EEA firms that do not enter into the UK’s temporary permissions regimes to meet existing contractual obligations, as they will be performing regulated activities in the UK without these permissions.
The Treasury Select Committee (TSC) published its report on the Withdrawal Agreement (WA) economic analysis previously published by Her Majesty’s Treasury (HMT) and the Bank of England (BoE) – see Document 6 below. The TSC expressed strong disappointment that despite its insistence and the assurances given, HMT had not published a short term analysis of the different options. (HMT looked at a 15 year forecast but the TSC had requested a short term analysis over the 5 years following exit). The TSC also complained that HMT had not modelled the Withdrawal Agreement and the backstop regime and had instead modelled the Chequers White Paper (Chequers), despite this having been rejected by the EU.
HMT’s modelling of Chequers is on two bases – one is the policy/negotiating position of HMG (which is implausible as a likely outcome for the long term relationship (LTR)) and the other is adjusted with 50 per cent Non-Tariff Barrier (NTB) sensitivity i.e. with NTB’s assumed to be higher than in the Chequers scenario (NTBs (excluding costs due to customs checks) were set halfway between Chequers and the FTA/Canada scenario). It seems that his scenario is the closest to a guesstimate of a possible LTR negotiated on the basis of the Political Declaration (PD) framework. HMT also modelled a ‘no deal/WTO scenario’ and an EEA only scenario.
The TSC report has a chapter on FS which includes evidence from the Chancellor and UK regulators. HMT’s analysis shows the following increases in FS trade costs - arising entirely from non-tariff barriers (NTBs) - compared to EU membership –
HMT made assumptions for each scenario relating to three areas of NTBs - ‘barriers to market access arising from the loss of passporting’, ‘restrictions on temporary mobility for business purposes’ and ‘restrictions on the exchange of personal data’. Our April 2017 report looked in detail at the first of these i.e. regulatory barriers to market access from dual regulation (DR Barriers). For no-deal and FTA scenarios all three factors seem to be relevant. For the other scenarios it is increased DR barriers which drive the outcome. HMT’s assumptions for DR barriers under Chequers seem very optimistic; they assume a substantial reduction in DR barriers as compared to an FTA. This is on the basis that the EU would introduce extensive new third country equivalence based market access for the benefit of the UK and other third countries. The 50% NTB sensitivity scenario is perhaps intended as a more realistic proxy for an outcome under the WA/PD, but this still assumes a significant improvement in third country access. As we explained in our update for the week ending 7th December, there is nothing in the PD wording to give any confidence that the EU will substantially reduce DR barriers. On this basis, even the 9% increase in trade costs may well underestimate the negative impact of the LTR.
The BoE provided macroeconomic analysis for 2019 to 2023 with six scenarios – close and a less close economic partnership, a prepared and an unprepared transition to WTO and a ‘disruptive’ and a ‘disorderly’ no transition and no deal. The report stressed the increasing importance of NTB in trade relations. In FS the BoE assumed that NTBs from the loss of passporting/single market DRC would not be offset in the ‘no transition no deal scenarios’ and that in the economic partnership scenarios EU equivalence frameworks would mitigate a quarter of this loss (less close partnership) and a half of the loss (in the close partnership). The BoE’s economic partnership models seem to paint an optimistic picture for FS; the wording of the PD on FS (see our update for the week ending 7th December) hardly seems to herald the EU opening up its financial markets to third countries under equivalence frameworks which offer a half of the single market benefits? The report emphasised that the TP would reduce the cliff-edge shock/impact of a no transition no deal scenario by allowing FS firms time to adapt to the loss of single market DRC.
The TSC also took evidence on the question of ‘rule taking’ where the UK regulators (perhaps un-surprisingly) were concerned, particularly in the context of a medium/long term arrangement such as EEA membership. They thought, however, that the short-term rule taker risk under the WA transition period (TP) was outweighed by the benefits of having a TP. The Chancellor is reported as being more sanguine about rule taker risk. The FS chapter also looks briefly at no deal preparations in the FS sector.
As widely reported in the press, the CJEU gave its judgement in the Wightman case on Article 50 (see Document 16 below). The case was reviewed in the HoC Library report – see Document 17 below which summarises the position – Any decision to revoke the Article 50 notice must be an ‘unequivocal and unconditional’ decision: ‘the goal of revocation must be to actually stay in the EU, not to alter the shape of negotiations’…. ‘What all of this means for the UK, in short, is that if a constitutionally valid domestic decision was taken to revoke the Article 50 TEU notice before the WA enters into force (or, if no WA is agreed, before the end of the Article 50 period), this would result in the UK remaining an EU Member State on the same terms that it is now, and such a domestic decision would not be subject to any form of approval at the EU level.’
1. EU: THE EUROPEAN COMMISSION IMPLEMENTS “NO DEAL” CONTINGENCY ACTION PLAN
The EU has started to implement its preparations for a no-deal Brexit by announcing temporary measures in certain key areas, which includes financial services. The full plan can be accessed here. The Commission has also published questions and answers regarding the consequences of the UK leaving the EU without a ratified Withdrawal Agreement, which can be accessed here.
The Commission has proposed the following acts to be adopted from withdrawal date if the Withdrawal Agreement is not ratified:
“A temporary and conditional equivalence decision for 12 months to ensure that there will be no disruption in central clearing of derivatives. This will allow the European Securities and Markets Authority (ESMA) to recognise temporarily central counterparties currently established in the United Kingdom, allowing them temporarily to continue providing services in the Union. The Commission has concluded that EU27 companies need this time to have in place fully viable alternatives to UK operators.
A temporary and conditional equivalence decision for 24 months to ensure that there will be no disruption in services provided by UK central securities depositories. It will temporarily allow them to continue providing notary and central maintenance services to operators in the Union. This will allow EU27 operators that currently have no immediately available alternative in the EU27 to fulfil their obligations under EU law.
Two Delegated Regulations facilitating novation, for a fixed period, of certain over-the-counter derivatives contracts with a counterparty established in the United Kingdom to replace that counterparty with a counterparty established in the Union. This allows such contracts to be transferred to an EU27 counterparty while maintaining their exempted status and thus not becoming subject to clearing and margining obligations under the European Market Infrastructures Regulation. Such contracts, pre-dating EMIR, are exempted from EMIR requirements. This act will ensure that a change of counterparty will not change that exempted status.”
2. EU: QUESTIONS AND ANSWERS: THE CONSEQUENCES OF THE UK LEAVING THE EU WITHOUT A RATIFIED WITHDRAWAL AGREEMENT (NO DEAL BREXIT)
The Commission has published questions and answers regarding the consequences of the UK leaving the EU without a ratified Withdrawal Agreement, which can be accessed here. Questions 21-25 relate to financial services.
3. HMT: DRAFT FINANCIAL SERVICES CONTRACTS (TRANSITIONAL AND SAVING PROVISION) (EU EXIT) REGULATIONS 2019
Post-Brexit, there will be some EEA firms that do not enter into the UK’s temporary permissions regime that will not be able to meet existing contractual obligations, as they will be performing regulated activities in the UK without these permissions. HMT has published this draft SI to provide a run-off mechanism to ensure existing contracts continue to be serviced. The SI can be accessed here and the explanatory notes here.
4. FCA: THE FINANCIAL SERVICES CONTRACTS REGIME
The FCA has published a webpage in which it considers the recently published draft SI and notes plans for a consultation in early 2019. The webpage can be accessed here.
“The FSCR is created solely to allow EEA firms to run off existing UK contracts and conduct an orderly exit from the UK market. EEA firms within this regime will not be able to write new UK business. They will be limited to regulated activities which are necessary for the performance of pre-existing contracts.”
“The FSCR will automatically apply to EEA passporting firms that do not notify us that they wish to enter the temporary permissions regime, but have pre-existing contracts in the UK which would need a permission to service. The FSCR will be time limited depending on the type of regulated activity being performed: it will apply for a maximum of 15 years for insurance contracts and 5 years for all other contracts.”
5. ESMA: PROPOSED AMENDMENTS TO THE TICK SIZE REGIME
ESMA has published its final report regarding proposed amendments to Commission Delegated Regulation (EU) 2017/588 (RTS 11). The amendments will allow national competent authorities of EU trading venues, where third-country shares are traded, to decide on an adjusted average daily number of transactions on a case-by-case basis in order to take into account the liquidity available on third country venues in the calibration of tick sizes.
Steven Maijoor notes: "the proposed amendment is …relevant in the context of [Brexit] which may result in a significant increase of the number of equity instruments for which the most liquid trading venue is located outside the Union". The report can be accessed here.
6. TSC: THE UK’S ECONOMIC RELATIONSHIP WITH THE EUROPEAN UNION: THE GOVERNMENT’S AND BANK OF ENGLAND’S WITHDRAWAL AGREEMENT ANALYSES
TSC has published a unanimously-agreed Report on the Withdrawal Agreement and Political Declaration. It states that FCA has "expressed concern about being a ‘rule taker’ with no influence" and that, when assessing the financial services sector's ability to withstand a "no deal" scenario, Mark Carney had "provided reassurance that [BoE is] already sleeping soundly at night, because the core of the financial sector is in the position that it needs to be in for the tough scenario". The full paper can be accessed here.
“CGE models are widely employed in economic analysis of international trade. The Government’s model has the advantage of analysing decisions about trade at a significant level of sectoral detail. It also analyses the economy in the long term only, assuming there is full employment of capital and labour. As such, it does not show how the economy will transition to the new trading relationship, the path taken by inflation and unemployment, and whether the transition could result in increased structural unemployment. The White Paper scenario represents the most optimistic and generous reading of the Political Declaration, insofar as it is consistent with it at all. It certainly does not represent the central or most likely outcome under the Political Declaration, and therefore cannot be used to inform Parliament’s meaningful vote on the Withdrawal Agreement. Parliament may prefer to draw from the range of the scenarios in the Government analysis, additionally informed by external analysis and comment, in order to assess the economic impact of the Withdrawal Agreement.”
7. THE PROTOCOL 1 TO THE EEA AGREEMENT (AMENDMENT) (EU EXIT) REGULATIONS 2018
This instrument makes limited technical legal amendments to Protocol 1 to the EEA Agreement, a mechanism by which EU law is currently applied to and in the EEA EFTA states. The SI can be accessed here and the explanatory note here.
“As with all RDEUL [retained direct EU law] that will be incorporated into the UK statute book, it is necessary to make sure that on exit day Protocol 1 continues to function properly. This statutory instrument makes provision in order that it will.
In particular, it provides that:
Protocol 1 will only apply to the EU law, incorporated into the EEA Annexes, which forms part of RDEUL.
Any obligation owed to or right conferred on EU Member States, their public entities, undertakings or individuals, is also owed or conferred on EEA EFTA states, their competent authorities, public entities, undertakings or individuals. The RDEUL version of Protocol 1 will not impose obligations on EEA EFTA states, their competent authorities, public entities or individuals.
Redundant paragraphs in Protocol 1 are removed. For example, Protocol 1 provides for review and reporting requirements for EEA EFTA states. On exit day these provisions will be obsolete since the UK will no longer be an EEA EFTA state and RDEUL cannot apply to the EEA EFTA states.”
8. MOJ: THE LAW APPLICABLE TO CONTRACTUAL OBLIGATIONS AND NON-CONTRACTUAL OBLIGATIONS (AMENDMENT ETC.) (EU EXIT) REGULATIONS 2018
The purpose of this SI is to ensure that EU laws applicable to contractual and non-contractual obligations continue to operate effectively in domestic law post-Brexit. Those EU rules are contained, in particular, in Rome I and Rome II. The SI can be accessed here and the explanatory notes here.
“Upon the UK’s exit from the EU, Rome I and Rome II, and the domestic legislation that gave effect to these EU Regulations, will be retained under the European Union (Withdrawal) Act 2018 (the “Withdrawal Act”) but will contain deficiencies that need correcting in order for the rules on applicable law to continue to work effectively as UK domestic law after exit day. The UK will also cease to participate in the 1980 Rome Convention, meaning the Convention’s rules will no longer apply to the UK as a matter of international law. Amendments are needed to the Contracts (Applicable Law) Act 1990, which incorporated the 1980 Rome Convention into domestic law, in order to preserve the substantive rules of the Convention so that they will continue to apply to existing contracts entered into between 1 April 1991 (the date on which the Rome Convention came into force) and 16 December 2009 (after which Rome 1 replaced the Convention in the relevant EU Member States).”
9. HMT & US TREASURY OFFICE: THE UK-US COVERED AGREEMENT
The US and UK have signed a Bilateral Agreement on prudential measures regarding insurance and reinsurance. The Covered Agreement is an important step towards providing regulatory certainty and market continuity as the UK prepares to leave the EU. The agreement can be accessed here.
10. HMT: DRAFT OFFICIAL LISTING OF SECURITIES, PROSPECTUS AND TRANSPARENCY (AMENDMENT) (EU EXIT) REGULATIONS 2019
HMT has published this draft SI, which will make amendments to retained EU law related to securities, prospectuses and transparency requirements, to be laid under the EU (Withdrawal) Act. The SI can be accessed here and the explanatory information here.
“It ensures that the prospectus regime will be applicable to issuers making an offer to the public in the UK or applying to admit securities to a regulated market in the UK, and the transparency framework will be applicable to issuers with securities traded on regulated markets in the UK, and will continue to operate effectively in a UK-only context. The official listing regime, applicable to firms seeking, or having secured, admission of their securities to the Official List of the Financial Conduct Authority, will also meet this objective.
The SI replicates, as far as possible, the current effects of the prospectus regime, the transparency rules and the listing rules that apply across the EU.”
11. HMT: FINANCIAL SERVICES (DISTANCE MARKETING) (AMENDMENT AND SAVINGS PROVISIONS) (EU EXIT) REGULATIONS 2019
HMT has published this draft SI, which will make amendments to UK legislation related to the UK’s distance marketing of retail financial services regime, to be laid under the EU (Withdrawal) Act. The SI can be accessed here and the explanatory information here.
“This SI will make amendments to the Financial Services (Distance Marketing) Regulations 2004 to ensure that the regulations continue to operate effectively in the UK once the UK has left the EU.
We have worked very closely with regulators, specifically the FCA, to develop the necessary changes.
Changes introduced by the SI include:
Once the UK has left the EU/EEA, it will no longer be appropriate for UK legislation to refer to EU/EEA bodies, territories and instruments. To ensure the Financial Services (Distance Marketing) Regulations 2004 continue to operate effectively, references to EU and EEA bodies, territories and instruments have been omitted where necessary. Additionally, references to the European Consumer Credit Information Form have been replaced with references to the Pre-Contract Credit Information (Overdrafts) Form.”
12. HMT: DRAFT LONG-TERM INVESTMENT FUNDS (AMENDMENT) (EU EXIT) REGULATIONS 2019
HMT has published this draft SI, which will amend the retained version of the Regulation on European long-term investment funds ((EU) 2015/760). The SI can be accessed here.
13. HMT: DRAFT COLLECTIVE INVESTMENT SCHEMES (AMENDMENT ETC.) (EU EXIT) REGULATIONS 2019
HMT has published this draft SI, which will amend the retained version of the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive. The SI can be accessed here, and the explanatory note here.
14. HMT: DRAFT SECURITISATIONS (AMENDMENT) (EU EXIT) REGULATIONS 2019
HMT has published this draft SI, which will amend the retained version of the EU’s securitisations regulations. The SI can be accessed here and the explanatory notes here.
15. HMT: COMMON TRANSIT CONVENTION
HMT has confirmed that the UK is set to remain in the Common Transit Convention (CTC) after Brexit, ensuring simplified cross-border trade for UK businesses exporting their goods. The CTC is used for moving goods between the EU member states, the EFTA countries (Iceland, Norway, Liechtenstein and Switzerland) as well as Turkey, Macedonia and Serbia. The webpage can be accessed here.
16. CJEU: JUDGMENT IN THE CASE C-621/18 WIGHTMAN AND OTHERS V SECRETARY OF STATE FOR EXITING THE EUROPEAN UNION
The Court of Justice of the European Union held that the court has jurisdiction and that Article 50 is unilaterally revocable. The press release can be accessed here.
“It follows, in the first place, that, for as long as a withdrawal agreement concluded between the European Union and that Member State has not entered into force or, if no such agreement has been concluded, for as long as the two-year period laid down in Article 50(3) TEU, possibly extended in accordance with that provision, has not expired, that Member State — which enjoys, subject to Article 50(4) TEU, all of the rights and remains bound by all of the obligations laid down in the Treaties — retains the ability to revoke unilaterally the notification of its intention to withdraw from the European Union, in accordance with its constitutional requirements.
In the second place, the revocation of the notification of the intention to withdraw must, first, be submitted in writing to the European Council and, secondly, be unequivocal and unconditional, that is to say that the purpose of that revocation is to confirm the EU membership of the Member State concerned under terms that are unchanged as regards its status as a Member State, and that revocation brings the withdrawal procedure to an end.
In view of all the foregoing, the answer to the question referred is that Article 50 TEU must be interpreted as meaning that, where a Member State has notified the European Council, in accordance with that article, of its intention to withdraw from the European Union, that article allows that Member State — for as long as a withdrawal agreement concluded between that Member State and the European Union has not entered into force or, if no such agreement has been concluded, for as long as the two-year period laid down in Article 50(3) TEU, possibly extended in accordance with that paragraph, has not expired — to revoke that notification unilaterally, in an unequivocal and unconditional manner, by a notice addressed to the European Council in writing, after the Member State concerned has taken the revocation decision in accordance with its constitutional requirements. The purpose of that revocation is to confirm the EU membership of the Member State concerned under terms that are unchanged as regards its status as a Member State, and that revocation brings the withdrawal procedure to an end.”
17. HOUSE OF COMMONS LIBRARY: BREXIT: ARTICLE 50 TEU AT THE CJEU
The full report can be accessed here.
Other publications from the RegZone Brexit news feed
Department for Exiting the EU: Statement by Steve Barclay
Steve Barclay's statement to HoC of 10 December 2018 with regard to the revocability of Article 50 follows. The full speech can be accessed here.
The Financial Markets and Insolvency (Amendment and Transitional Provision) (EU Exit) Regulations 2019
This SI has been laid before Parliament and can be accessed here.
EC: Invitation letter from Donald Tusk
This letter was sent on 12 December 2018 to the members of the European Council ahead of their meetings on 13 and 14 December 2018. Donald Tusk notes "we will listen to the UK Prime Minister's assessment, and later, we will meet … to discuss the matter and adopt relevant conclusions. As time is running out, we will also discuss the state of preparations for a no-deal scenario". The full letter can be accessed here.
The Credit Rating Agencies (Amendment, etc.) (EU Exit) Regulations 2019
This SI has been laid before Parliament. The SI can be accessed here.
FCA: Regulation round-up
The latest edition of FCA's round-up of recent includes a link to its updated webpage on preparing for Brexit, specifically with regard to contract continuity; execution of firms’ contingency plans; customer communications and data sharing. The full update can be accessed here.
HMT: Money Market Funds (Amendment) (EU Exit) Regulations 2018
HMT has updated the explanatory information for this SI. The updated note can be accessed here.
HoL: Adjournment of the HoL debate on the Withdrawal Agreement and Political Declaration
On 10 December 2018, HoL adjourned this debate. This HoL library briefing summarises recent developments which may influence when HoL has the opportunity to debate this matter again. The full briefing can be accessed here.
HMT: List of made financial services SIs
HMT's webpage provides a list of made financial services SIs made under the EU (Withdrawal) Act 2018, which were subject to the affirmative procedure. This will be updated as further SIs are made and can be accessed here.
ECB: Speech by Ignazio Angeloni: ECB supervision at 5: challenges, opportunities and wishes
Text of this speech, given on 10 December 2018 follows, in which Ignazio Angeloni discusses Brexit and cross-channel cooperation; geopolitical trends in banking and the changing nature of bank risks. The full speech can be accessed here.
HMT: Speech by Philip Hammond
Text of a speech given by Philip Hammond on 11 December 2018 follows in which he discusses Brexit and financial services regulation. The full speech can be accessed here.
HoC Committee on Exiting the EU: The progress of the UK's negotiations on EU withdrawal - The Withdrawal Agreement and Political Declaration
HoC's report concludes that the "Prime Minister’s deal fails to offer sufficient clarity or certainty for the future of the UK and suggests "if the Government’s main priority is to secure EU-UK trade that is as frictionless as possible, it must decide how far it is willing to follow EU rules. This is not a choice the Government has so far been willing to make". The full publication can be accessed here.
HoC Library Briefing Paper: State aid, public ownership and workers rights after the UK leaves the EU
This briefing paper discusses state aid, public ownership and workers rights after the UK leaves the EU. The full publication can be accessed here.
HoC European Security Committee: 48th Report of Session 2017-19
This report considers the EU’s contingency planning in a ‘no deal’ scenario and details the latest ministerial responses to the Committee’s specific concerns. This matter is still under scrutiny by the Committee. The report can be accessed here.
EC: Article 50 conclusions of 13 December 2018
The European Council adopted a statement that, amongst other matters, notes that the Withdrawal Agreement "is not open for renegotiation" and calls for Brexit-related work to be intensified "taking into account all possible outcomes." The conclusions can be accessed here and here.
PMO: Statement by Theresa May
Text of Theresa May's statement of 14 December follows, in which she states "I note there has been reporting that the EU is not willing to consider any further clarification. The EU is clear – as I am – that if we are going to leave with a deal this is it. But my discussions with colleagues today have shown that further clarification and discussion following the Council’s conclusions is in fact possible". The press release can be accessed here.
ECB: Supervision of significant institutions
ECB reports that it will directly supervise 119 banks in 2019. It states that Barclays Bank Ireland and the Irish subsidiary of Bank of America Merrill Lynch to be directly supervised by ECB due to anticipated increases in size following Brexit. The publication can be accessed here.
PMO: Statement by Theresa May
Theresa May's statement to HoC of 10 December 2018 follows. The full statement can be accessed here.
FCA: Statement on treatment of Gibraltar in our Handbook after Brexit
The FCA has published a statement that they will make a rule to preserve the existing Handbook treatment in respect of Gibraltar in post exit day handbook. The full statement can be accessed here.
HMT: Draft Financial Services (Gibraltar) (Amendment) (EU Exit) Regulations 2019
This draft SI deals with financial services passporting rights between the UK and Gibraltar. The draft SI 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.