Brexit: Regulatory updates

18 January 2019

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.

European Commission announces temporary equivalence for CCPs

The European Commission (EC) announced  on 19 December 2018 a set of measures in case of a no-deal Brexit:

  •    UK Central Counterparties (CCPs) will be granted temporary equivalence under EMIR for 12 months
  •    UK Central Securities Depositories (CSDs) will be granted a temporary equivalence period of 24 months under Central Securities Depositories Regulation
  •   The EC has also confirmed temporary 12-month measures to facilitate the novation of bilateral contracts between UK and EU-27 entities

Whilst this brings relief, a longer term arrangement such as a full equivalence decision, may be contingent on an agreement between the UK and EU on the wider future relationship. ESMA and the BoE have welcomed the announcement, with ESMA suggesting it expects to be able to conclude an agreement on information sharing by the end of January.

The EC has confirmed proposals from ESMA, which would remove the requirement for non-centrally cleared derivative contracts to be centrally cleared and subject to the initial margin requirements in EMIR, when they are novated between a UK and EU entity within 12 months of Brexit.

The temporary permissions regime is now open

The notification window for the temporary permissions regime (TPR) opened on 7 January 2019 on the FCA's website and closes on 28 March 2019. Firms wishing to enter the TPR should notify the regulators through the FCA’s website prior to Brexit. Those firms that have submitted an application for authorisation will be automatically entered into the TPR.

The TPR aims to minimise disruption for EU firms currently operating in the UK due to the loss of passporting rights, if the UK leaves the EU without an implementation period. It allows firms and investment funds to continue to operate in the UK during three years while they seek to obtain permanent authorisation or recognition from UK regulators.

Under the TPR, firms will be subject to regulatory requirements, for third countries, but the regulators have indicated that many of these requirements will be phased in.

Firms that have not submitted a notification for the TPR will not be able to use the regime. Under certain conditions, they will be subject to the financial services contracts regime (see below).  Funds managers that have not submitted a notification will not be able to continue marketing their funds in the UK after exit day, except for new sub-funds of EEA UCITS that are in the temporary permissions marketing regime on exit day.

Once authorised, firms will leave the TPR. For firms that do not seek or are denied authorisation, there will be an orderly run-off of their UK activities.

FCA launches consultation for Financial Services Contracts Regime

On 17 December 2018, HM Treasury issued the draft Financial Services Contracts (Transitional and Saving Provisions) (EU Exit) Regulations 2019 (FSCR) which establish the Financial Services Contracts Regime.

This will allow the orderly wind down of UK regulated activities of firms that do not enter the TPR after exit day, if there is no Withdrawal Agreement. These firms can continue to carry out business to run off pre-existing contractual obligations in the UK, but not to undertake new business. The draft statutory instrument provides for automatic entry into the regime.

Firms with a UK branch will be placed into a supervised run-off and will be ‘deemed’ Part 4A authorised for purposes of winding down UK regulated activities in an orderly manner. Firms without a UK branch (currently operating under a freedom of services passport) will be placed into a contractual run-off and will continue to be supervised by their home state regulators.

The FSCR will run for a period of five years, however for longer term insurance contracts the effective period will be 15 years. Firms should also note that whilst within the FSCR they will remain members of the FSCS.

The FCA has published a further consultation paper on the proposed implementation of the FSCR and invites feedback until 29 January 2019.

Andrew Gray

Andrew Gray | Partner
Profile | Email | +44 (0)20 7804 3431

Connor MacManus

Connor MacManus | Senior Manager
Profile | Email | +44 (0)20 7213 8555

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