Brexit update for financial services firms - week ending 25 January 2019

31 January 2019 Download PDF

In outline:

As the Westminster stand-off continued last week, with the clock running down towards 29th March, there was a slight pause in the flow of Brexit material in the financial services (FS) sector. The Treasury Select Committee (TSC) published a letter from HMG (from the week before) about the previously published legislation to delegate  a temporary transitional power to UK regulators (the BoE, the PRA and the FCA) for a no-deal scenario (see Document 2 below and our previous update).

Full details of the progress of FS related NtA  statutory instruments can be tracked in the RegZone no deal database.

HMG published information about two insurance agreements to replace or ‘rollover’ EU DRC  agreements with third countries (TCs). The text of the 2018 UK/US agreement on insurance and reinsurance prudential measures (the US/UK insurance agreement) was published by the Foreign and Commonwealth Office (see Document 1 below); this agreement replicates the 2017 EU/US agreement with the same title .

HMG  also published a very brief joint statement on the 2018 UK/Switzerland agreement on direct insurance other than life insurance (the Swiss/UK insurance agreement) - see Document 4 below and our commentary in previous update; this agreement replicates the Swiss/EU insurance agreement which goes back to 1989/91 . The Swiss government has published a more detailed explanatory statement and the full text of the Swiss/UK agreement; you can read our analysis in a separate RegZone article.

The TSC announced a new inquiry into the priorities in FS for the UK’s future trading relationship with the EU and third countries, and how the FS sector can take advantage of the UK’s new trading environment with the rest of the world, and whether the UK should maintain the current regulatory barriers that apply to third countries (see Document 2 below). The announcement about the Swiss/UK insurance agreement seems to have sparked some interest at the TSC in the context of its new inquiry .

In the next update, we will look in detail at the insurance agreements above and consider the broader implications in the context of the issues for the TSC inquiry.

1. UK-US BILATERAL AGREEMENT ON INSURANCE AND REINSURANCE PRUDENTIAL MEASURES

The Foreign & Commonwealth Office published the final version of the UK-US bilateral agreement on prudential measures regarding insurance and reinsurance on 22 January. The agreement can be accessed here and the explanatory memorandum here.
The UK-US Agreement is based on US recognition of the package of insurance regulation known as Solvency II as equivalent to US prudential standards for insurance. The EU regulations within the Solvency II package will be carried over to UK law as part of the European Union (Withdrawal) Act 2018.


2. TSC: INQUIRY LAUNCHED INTO FUTURE OF UK’S FINANCIAL SERVICES POST-BREXIT

On 25 January, the Treasury Select Committee (TSC) launched an inquiry into the future of the UK’s financial services once the UK has left the EU. The inquiry can be accessed here.

The Committee examines what the Government’s financial services priorities should be when it negotiates the UK’s future trading relationship with the EU and third countries.

Commenting on the launch of the inquiry, Rt Hon. Nicky Morgan MP, Chair of the Treasury Committee, said:

“London is the world’s premier financial centre, and many of us want to keep it that way.

Brexit will have a significant and long-lasting impact on the financial services sector, including the insurance, retail banking and asset management sectors, in the UK, the EU, and potentially the rest of the world.

The UK may converge, seek equivalence, or diverge from the EU. As part of our new inquiry, the Treasury Committee will examine the risks and rewards of each of these choices.

We’ll also explore the opportunities outside Brexit, such as FinTech, on which we should be capitalising.

After we’ve taken evidence from industry, regulators, ministers and officials, we’ll make a series of recommendations to the Government and regulators about what it should prioritise in negotiations with the EU and the rest of the world.

We’ll also seek to conclude whether it would be in the long-term interests of the UK to align closely with EU financial rules, or to forgo financial services trade with the EU and pursue trade with other third countries.”


Following the announcement, UK Finance Chief Executive Stephen Jones responded to the launch of the Treasury Committee inquiry and the publication can be accessed here:

“The UK’s position as a world-leading financial centre post-Brexit is central to our economic and social prosperity. It is crucial that the government, Parliament, regulators and the industry all work closely together to preserve it.

We must avoid fragmentation of global markets in which the UK is a leader, maintain strong and proportionate regulation whilst supporting innovation including in our critical fintech sector. We also need to ensure the UK’s tax policy is globally competitive. The UK is and should always seek to be the safest and most transparent place for financial service providers to do business, with an unwavering commitment to eliminating cyber and economic crime.”


3. HMT: TRANSITIONAL POWERS FOR UK REGULATORS IN EVENT OF NO-DEAL BREXIT

The Treasury Select Committee published a letter by John Glen to Nicky Morgen detailing the government’s proposal for temporary powers to be granted to UK regulators (BoE, PRA and FCA) in the event of no-deal. The letter and the proposed legislation can be accessed here.

“The proposal to delegate a temporary transitional power to regulators is an important part of our no deal contingency planning for financial services, and is intended to complement and support other key transitional arrangements which Parliament has already approved, including the Temporary Permissions Regime (TPR). It must be emphasised that this proposal would be appropriate for a no-deal scenario only - in the event that a withdrawal agreement with the EU is ratified this measure will immediately be withdrawn and the delegation of power to the regulators revoked.

[…]

The proposal set out in the draft provisions attached would delegate a temporary power to the regulators to delay, or phase in, regulators’ requirements where they either change as a result of the UK leaving the EU, or apply to firms for the first time. It must be stressed that this does not enable the regulators to change the end-state requirements that Parliament has approved in statutory instruments made under the EU Withdrawal Act (EUWA) – the changes that Parliament has approved in those instruments will constitute the post-exit regime that UK regulated firms will need to comply with. Firms will have to reach compliance with the requirements set by Parliament no later than 2 years from exit, regardless of how the regulators use the temporary transitional power to phase them in.

The regulators will use the power to delay or phase in changed requirements for a period up to 2 years from exit. Delaying the requirements will not result in an absence of standards that firms must meet. The regulators will specify a temporary requirement that firms must meet in the interim, which we would expect to be the existing EU standards in the vast majority of cases.
[…]

The scope of this power, in terms of the regulators’ requirements it would cover, must be wide if the regulators are to have the flexibility they need.

[…]

Nevertheless, the draft power very clearly limits the scope of the power to those requirements for which the UK financial services regulators are responsible for supervising.

[…]

The draft powers set a very clear purpose for the regulators – the power can only be used to prevent or mitigate disruption to financial services firms that may reasonably be expected to arise as a result of onshoring changes to firms’ regulatory obligations. 

[…]


When making a direction, a regulator must:
  • Consult other regulators before the direction is made, if the direction would be relevant to another regulator’s functions;
  • Consult HM Treasury before direction is made.
  • Provide an explanation for its purpose
  • Provide such guidance for affected firms as the regulator thinks appropriate; and
  • Make a statement that the purpose of the direction is consistent with the regulator’s statutory objectives.”

4. EDA: JOINT STATEMENT ON SIGNING THE AGREEMENT BETWEEN THE UNITED KINGDOM AND THE SWISS CONFEDERATION ON DIRECT INSURANCE OTHER THAN LIFE ASSURANCE

Press release by the Swiss Federal Department for Foreign Affairs confirming that the Swiss have signed an agreement with the UK Government replicating the Swiss-EU insurance agreement. This agreement would apply both in a deal and no-deal scenario. The press release can be accessed here

“The UK-Swiss Direct Insurance Agreement is an important step in providing continuity and certainty for UK and Swiss non-life insurance firms as the UK prepares to leave the European Union (EU). The Agreement replicates the terms of the existing agreement between Switzerland and the EU. It will therefore ensure continuity for UK and Swiss insurers accessing the UK or Swiss market both now and in the future, consistent with the terms of the original EU-Swiss Direct Insurance Agreement. It will come into force once the UK is no longer subject to the existing EU-Swiss Direct Insurance Agreement.

The UK-Swiss Direct Insurance Agreement, like the EU-Swiss Direct Insurance Agreement, allows non-life insurance firms to branch into one jurisdiction from the other with greater ease through mutual recognition of solvency requirements.”


5. MICHEL BARNIER: SPEECH AT THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE

Michel Barnier delivers a speech on Brexit at the European Economic and Social Committee. The full speech can be accessed here.

On 19 December the Commission set out 14 measures which the Union could introduce unilaterally in areas where a no deal scenario would case major disruption to the public and businesses in the EU 27. For example:
  • In order to avoid major problems in the aviation sector, the Commission proposed allowing certain air services to be operated between the UK and the European Union for 12 months on condition of reciprocity.
  • In the customs field the Commission proposed adding the UK to the list of countries to which EU Member States are allowed to export dual-use items with civilian and military applications.
  • In the area of financial services the Commission proposed conditional equivalence for 12 months in order to avoid any immediate disruption in the central clearing of derivatives.
What all of these measures would have in common is that they are temporary, limited in scope and adopted unilaterally by the European Union.

The aim of these measures is to protect European interests, not to negotiate mini-deals with the United Kingdom. It will not be possible for the UK to maintain the advantages of EU membership.
 
Other publications from the RegZone Brexit news feed

European Union (Withdrawal) (No.3) Bill 2017-19

Yvette Cooper presented a Private Member’s bill, which would create a legal mechanism whereby the House of Commons can instruct the Prime Minister to ask the European Council for an extension to Article 50 in the absence of an approval resolution for an exit deal from the EU. The draft bill can be accessed here.

HoC: Reading list of post-EU Referendum publications by Parliament and the Devolved Assemblies

This reading list brings together briefings on Brexit by the Parliamentary libraries and the Devolved Assembly research services with reports by Parliamentary and Devolved Assembly committees following the result of the EU Referendum on 23 June 2016. The publications can be accessed here.

European Union Select Committee: Scrutiny of Brexit related treaties

The European Union Select Committee and its six sub-committees began scrutinising all Brexit-related treaties, or international agreements, that the Government lays before Parliament prior to ratification. The press release can be accessed here.

HoC: Devolved Legislature Business

This paper is a record of Brexit-related business in the devolved legislatures and it is updated weekly. The publication can be accessed here.

The Taxation (Cross-border Trade) Act 2018 (Appointed Day No. 2) (EU Exit) Regulations 2019

This Taxation (Cross-border Trade) Act 2018 (Appointed Day No. 2) (EU Exit) Regulations 2019 has been enacted. The text of the SI can be accessed here.

HoC:Proposals for the future UK-EU relationship


This briefing paper looks at various options for the future UK-EU relationship. 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.
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Future Dates

* Estimated date

  • 1 December 2019

    End of four-year transitional period for RTS on risk-mitigation techniques for OTC derivatives contracts not cleared by a CCP under EMIR.

  • 9 December 2019

    PRA Consultation CP20/19 closes. 

  • 9 December 2019

    The changes set out in the appendices of PRA PS20/19, implementing changes to the prescribed responsibility for recovery and resolution under SM&CR,  will come into force.