Brexit: regulatory developments: April-May 2018
23 May 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.
BoE and ECB to convene Brexit working group
On 27 April 2018, the Band of England (BoE) and European Central Bank (ECB) announced that they will form a technical working group to look at risks to financial services in the period around the date the UK leaves the EU (30 March 2019). The group will be chaired by Mark Carney, the Governor of the BoE and Mario Draghi, the President of the ECB. HM Treasury (HMT) and the European Commission (EC) will attend as observers and other relevant authorities will be invited on an issue-specific basis.
The ECB and BoE will report regularly to HMT and the EC on the progress made by the group, but the technical working group is separate to the ongoing negotiations between the UK and EU on future relations. The announcement also makes clear that the primary responsibility to prepare for Brexit remains with market participants.
At this stage only limited information is available on the specific mandate and focus of the group. But the group may examine issues relating to potential financial stability risks posed by Brexit, such as the ability of financial services firms to meet contractual obligations which require regulatory approvals which may terminate when the UK leaves the EU.
This announcement is a welcome sign that authorities in the UK and EU-27 are actively discussing ways to address the cliff-edge risks associated with Brexit. Greater certainty for financial services firms on how issues such as contract continuity may be resolved would certainly be very welcome.
Government sets out plans for post-Brexit regulation
The Government has provided important information on the future of UK financial regulation, should the UK leave the EU in March 2019 with no transitional arrangement. On 25 April 2018, the Government provided further details on its proposed approach for bringing EU financial regulation into UK law prior to Brexit. Parliament is currently considering the European Union (Withdrawal) Bill (the Bill) which will repeal the European Communities Act 1972. The Government is proposing to bring directly applicable EU financial services regulation into UK rules and to amend so called ‘inoperables’ - areas where EU institutions such as the EC or European Banking Authority (EBA) have been given powers which will no longer apply post-Brexit.
Under the Government’s preferred approach, all EU level 1 legislation (e.g the rules included in regulations and directives) and some level 2 legislation (e.g delegated acts implemented by the EC) would be implemented by Parliament in secondary legislation. Responsibility for those level 2 rules currently implemented through Binding Technical Standards (BTS) by the European Supervisory Authorities (ESAs) would become the responsibility of the UK’s financial services regulators and would be implemented through regulatory rules. Parliament will need to make a decision as to which UK regulator will be responsible for each of the BTS in EU legislation. The PRA is likely to be given responsibility for the majority of BTS developed by the EBA, but in some cases the FCA and PRA may be given joint responsibility, e.g where a BTS applies to investment firms or covers both prudential and conduct issues.
In addition, the Government is proposing to transfer certain supervisory activities currently undertaken by the ESAs to the UK regulators. Post-Brexit the BoE will be responsible for recognising third country Central Counterparties (CCPs) so they can provide services in the UK. The FCA will take on responsibility for supervising credit rating agencies and trade repositories, a role currently undertaken by ESMA.
The Government argues the proposed split between legislation and regulatory rules is most appropriate because level 1 rules ‘set the policy direction’ whereas BTS ‘fill out the technical detail of how the requirements set at level 1 are to be met’. It says this approach is designed to ensure Parliamentary oversight of the UK’s financial services regulatory regime post-Brexit, but it will also mean that very technical, granular rules such as those in Capital Requirements Regulation (CRR), European Market Infrastructure Regulation (EMIR) and Markets in Financial Instruments Directive (MiFID) will be included in secondary legislation. Some have argued that MPs may find it challenging to exercise appropriate scrutiny under this approach. It should be noted though that the Government’s approach could change should the transitional period go ahead and the UK only need a new regulatory rulebook from the start of 2021.
For firms, complying with rules in secondary legislation will be far from new, but having the majority of the regulatory rule book in legislation will be a departure from current practice. Industry engagement in the process of bringing EU regulation into UK legislation will be important and firms should seek to engage with HMT to ensure their views are taken into account. The Government is also encouraging the use of machine readable regulatory rules as part of its FinTech strategy. Machine readable rules have the potential to reduce compliance costs for firms so an important consideration will be whether this approach is factored into its plans to bring EU regulation into UK law.