Brexit: regulatory developments: August 2018
20 August 2018
Brexit: regulatory developments
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.
Government sets out post-Brexit vision for financial services
The Government published The future relationship between the UK and the European Union on 12 July 2018. The publication includes details of the Government’s preferred market access model for financial services firms between the UK and EU post-Brexit. The Government is proposing that market access be based on expanding and improving existing equivalence regimes. This approach differs from the previous mutual recognition model proposed by the Government, as decisions on access to their markets would remain the autonomous decision of the UK and EU.
Where equivalence provisions already exist in pieces of financial services legislation (e.g. EMIR, MiFID) the Government is proposing that the UK be granted equivalence and for this to apply from the end of the transitional period (1 January 2021).
The Government is concerned that the EU’s current equivalence framework will not be adequate for the UK post-Brexit and is proposing that a number of amendments be made to it. These include:
- A requirement that equivalence decisions focus on regulatory outcomes, rather than a requirement for identical regulation.
- Expanding the scope of the EU’s current equivalence regime to cover financial services not currently in scope (such as insurance and deposit taking) and a commitment from the UK and EU that they will not adopt regulation which intentionally results in different regulatory outcomes.
- A more predictable and transparent process for determining equivalence and more certainty for financial institutions. Once equivalence is granted it should not be revoked at short notice and the criteria for allowing market access should not change, other than in exceptional circumstances.
- The Government is also proposing that there should be extensive supervisory cooperation and dialogue between the UK and EU post-Brexit. This would include UK and EU regulators being represented in supervisory colleges, establishing mechanisms for sharing information and a process for consulting on supervisory decisions that affect the other party.
At this stage these proposals should not impact on firms’ Brexit planning. They will be subject to negotiation with the EU-27 and the outcome of these negotiations is far from certain at this stage. EU-27 regulators continue to require all firms to plan on the basis of a hard Brexit on 29 March 2019. The Withdrawal agreement between the UK and EU-27 (including the transitional period) has yet to be agreed and certainty on whether the transitional will occur will only happen in October at the earliest.
Firms undertaking cross border UK/EU business should monitor the progress of the negotiations on financial services access closely. Those third country firms currently accessing the EU through equivalence provisions should also monitor developments on the EU’s approach to equivalence closely.
Further details on the temporary permissions regime
On 24 July 2018 the UK Government published a draft of the Statutory Instrument (SI) which is intended to deliver a temporary permissions regime (TPR) for EEA firms operating in the UK. The objective of the TPR is to minimise disruption for EU firms currently operating in the UK due to the loss of passporting rights. The aim is to allow firms to continue to operate in the UK for up to 3 years while they seek to obtain permanent authorisation or recognition from UK regulators.
Firms need to apply either by notifying the relevant regulator (PRA or FCA) of their intention to enter the regime before 29 March 2019 (exit day), or by submitting an application for authorisation before exit day. Applications for authorisation submitted prior to publication of the SI are also considered sufficient for notification purposes. The FCA is planning to make this an online process and firms will be expected to notify from January 2019 and before the exit day. Regulators can direct firms in the TPR to submit an application within 2 years of having entered the regime. Firms under the TPR will be deemed to have permission to carry out regulated activities in the UK for a maximum of 3 years.
The scope of permission will be limited to those the firm held prior to exit day. This means that firms under the TPR will be subject to the same regulatory and supervisory framework as any UK regulated firm. In order for these firms to manage the transition to UK rules, UK regulators will be able to phase in the requirements under the TPR.
The PRA will consult in the autumn on their approach to phasing in rules for firms under the TPR. The FCA expects firms under the TPR to comply with all the FCA Handbook rules that currently apply to them, plus those FCA Handbook rules (apart from those relating to capital) that apply requirements of an EU Directive but which are currently reserved to EEA firms’ ‘home state’. The FCA is willing to accept ‘substituted compliance’ where firms have demonstrated that the home state rules are equivalent to those in the FCA Handbook, but these firms will have to comply with certain additional consumer protection requirements.
The regime is intended to be available for three years from exit day but the SI provides HMT with the powers to extend the length of the regime by no more than 12 months at a time under certain circumstances. The SI also extends the deadlines for PRA or FCA to make a determination on applications for authorisation for EU firms operating in the UK via a passport to up to three years.
Once a firm is authorised it will leave the TPR and become fully authorised. Firms that do not submit an application for authorisation or fail to obtain one within the TPR period, will have their temporary permissions cancelled. Provisions for their orderly run-off will be published in the autumn.
Firms will now have more certainty about the time available to obtain authorisation in the UK. They should continue to engage with the relevant regulators to discuss how this extra time can be best used. Firms should also consider the implications of their new obligations under the TPR. Firms under the TPR will become UK regulated and will be required to comply with additional regulatory requirements.
FCA sets out expectations for booking models
The FCA published a Dear CEO letter on cross-border booking arrangements in relation to Brexit on 8 August 2018. The letter reminds firms of the need to ensure that the FCA is informed of and comfortable with their plans in advance. The letter sets out 6 principles that firms’ proposed booking models should comply with and requires firms to be able to demonstrate how these principles have been observed and implemented.
The FCA is clear that where firms are expanding their presence in the EU-27, any structural changes they make must not interfere with the FCA’s ability to supervise the conduct of the UK business or compromise a firm’s ability to meet the threshold conditions.
While the FCA states that it is open to proposals for legal entity structures and booking models and has no desire to restrict business models, it requires that all booking models should comply with these 6 principles:
- Firms should set out a clear rationale for their booking arrangements, document them and have them approved by the Board.
- Risk management should be appropriate for the firm’s booking activities including hedging arrangements.
- There is a broad alignment of risk and returns at the entity level.
- Firms should have adequate systems and controls in place to ensure that booking arrangements are followed.
- Firms should consider whether responsibility for oversight of booking arrangements should be explicit in statements of responsibilities.
Booking arrangements should not be an impediment to the firm’s recovery and resolution.
Those firms that are expanding their presence within the EU-27 should ensure that the FCA is kept informed of, and is comfortable with all proposed changes to legal entity structures and booking models that could impact their presence in the UK.
The UK boards and senior managers of affected firms should ensure that they have the appropriate governance in place to enable them to identify and mitigate the potential harm which could arise from modified booking arrangements.
Balancing the expectations of UK and EU-27 regulators will be a key challenge, particularly as the ECB has recently provided more details on its own expectations around booking models for banks in the euro area. The ECB has again voiced concerns that back-to-back booking models may not be transparent and have stated that firms should not be overly reliant on them. The ECB also expects banks in the euro area to have robust local governance and a significant staff presence, not to have an undue reliance on third country hubs (including to third country FMIs), to be able to manage intra-group exposures and adequate IT infrastructure and reporting capabilities.