Brexit regulatory round-up: March - April 2018
25 April 2018
Brexit is fundamentally affecting both UK and EU-27 financial services businesses from a regulatory and supervisory perspective. Anticipating a different relationship between the UK and EU-27 post-Brexit, regulators and other policy makers are expecting significant changes to their rules and processes. Developments are moving at a fast pace and firms need to understand the business implications as events unfold. Here, we summarise the most significant Brexit-related regulatory developments over the past month.
Transitional period agreed
On 23 March 2018, the UK Government and EU-27 Member States reached a political agreement on a transitional period to run from March 2019 to the end of 2020. During the transitional period the UK will continue to have full access to the EU’s single market. The UK Government has also stated that agreements reached by the EU with third countries (such as the US) will continue to apply during the transitional period. The UK will be required to apply EU legislation and rules during the transitional period, but will have no say on their development. Firms will not have legal certainty on the transitional period until all aspects of the withdrawal agreement are ratified (something that may happen at the earliest in October).
Financial services firms preparing for Brexit should not interpret the transition agreement as an opportunity to press the pause button, but should instead consider how to use the time provided by the transitional period to optimise their plans.
Some deadlines may be pushed back, particularly as UK regulators have said that European Economic Area (EEA) firms in the UK will have until the end of 2020 to gain authorisation in the UK. But EU-27 regulators have not given similar public commitments. Firms should continue to engage with UK and EU-27 regulators to ensure any plans to amend their implementation timetables or other planned actions are within the regulators’ risk appetite.
For further details please read PwC’s blog here.
PRA confirms branch risk appetite
On 28 March 2018, the Prudential Regulation Authority (PRA) confirmed its risk appetite for branches of banks and insurers. In December 2017 the PRA consulted on a policy which would allow EEA branches of both banks and insurers currently operating in the UK to continue doing so if they are below certain thresholds of systemic risk. The PRA has not made any substantive changes to the risk appetite it consulted on for banks, but has increased the threshold for Financial Services Compensation Scheme (FSCS) insured liabilities for insurance branches from £200m to £500m.
The PRA also indicated it expects to continue to cooperate closely with EU-27 regulators post-Brexit - which is a PRA requirement for allowing EU-27 firms to operate in the UK through branches.
Confirmation that the PRA will take a pragmatic and open approach towards branches is very welcome and shows a commitment to securing the UK’s position as an open global financial centre post-Brexit. EU-27 firms who plan to continue operating in the UK through a branch can now confirm those plans.
EEA banks and insurers with branches in the UK shouldn’t stop planning for Brexit. An ongoing dialogue with the PRA will help ensure the authorisation process is as smooth as possible once applications are submitted. EEA firms with branches in the UK are also likely to face challenges from EU-27 regulators. For banks, the European Central Bank (ECB) has indicated that it would be uncomfortable with significant EEA activity being undertaken in the UK.
European Parliament calls for equivalence overhaul
On 4 April 2018, the European Parliament (EP) published a report on equivalence provisions in EU financial services legislation. The report makes a number of recommendations on how the EU’s current approach could be improved. In particular the EP identifies the current regime as unpredictable, lacking transparency and overly political.
The European Commission (EC) is not legally bound by the report, so it is too early to say what impact it will have on the Brexit negotiations or on the EU’s approach to equivalence. But it could shape the EC’s approach to equivalence in future, potentially having a significant bearing on UK financial services firms post-Brexit.
The report should not influence firms’ Brexit plans at this stage. But it is important firms monitor developments on the EU’s approach to equivalence closely.
ECB updates Brexit FAQs
In March 2018 the ECB updated its Brexit FAQs. The FAQs set out the ECB’s expectations for banks seeking to relocate to the euro area or increase activities in existing entities due to Brexit. The ECB has updated its FAQs to make clear that it does not want firms to plan on the basis of there being a transitional period at this stage.
In addition to setting out the ECB’s expectations around the transitional period the FAQs provide significant amounts of detail on the ECB’s expectations on the authorisation process, internal governance and risk management, recovery planning, internal models for calculating capital requirements, booking models, recovery and resolution and ongoing supervisory issues. The ECB expects the banks it supervises to have significant risk governance capability locally, and to be able manage all material risks at the local level. The ECB will also expect euro area banks to be operationally independent and not overly reliant on outsourcing functions or services to the UK.
Banks should ensure that plans for post-Brexit arrangements are consistent with the ECB’s expectations. For example, some banks are considering a back-to-back booking models, with market risks continuing to be managed out of London. The ECB has made clear that they will scrutinise this approach closely and that part of the risk generated by all material product lines should be managed and controlled locally. Ongoing dialogue with the ECB will be important in fully understanding its expectations.
The Brexit opinions of the European Banking Authority (EBA), European Securities and Markets Authority (ESMA) and European Insurance and Occupational Pensions Authority (EIOPA) can also be found here.