On 25 October 2018, the Bank of England (BoE) and the Prudential Regulation Authority (PRA), preparing for a “no-deal” Brexit scenario, published a series of consultation papers (Consultation Package) with proposed amendments to the financial services legislation under the European Union (Withdrawal) Act 2018 (EUWA). This Consultation Package includes:

  • a joint BoE and PRA consultation paper (CP 25/18) on the overall approach of the BoE to fixing deficiencies in rules and onshored Binding Technical Standards (BTS); and
  • a PRA consultation paper (CP26/18) on the proposed changes to PRA Rulebook and onshored BTS within the PRA’s regulatory remit.

General approach and transitional relief

In case the UK leaves the EU without an implementation period in place, the general approach is that after exit day EU member states will be treated as ‘third countries’. As a result of this approach, firms and Financial Market Infrastructure providers (FMIs) of the European Economic Area (EEA) should be aware of the following key changes:

  • EEA firms and FMIs that currently passport into the UK will no longer be able to benefit from the EU passporting rights. However, to minimise potential disruption, the UK is putting in place a Temporary Permissions Regime (TPR) that will allow EEA firms and FMIs, subject to an appropriate application, to continue carrying out regulated activities in the UK for a maximum of three-year period as they work towards obtaining authorisation or recognition.
  • The competent UK regulators, to the extent relevant after Brexit, will take over the roles and responsibilities currently being carried out by EU authorities.
  • Supervisory cooperation and information sharing will operate on a non-mandatory or unilateral basis, as is currently the case with third country supervisors.
  • As a rule, the EU, EU member states and EU assets will not be granted preferential treatment.
  • Capital and liquidity consolidation will be required on a UK basis.
  • References to directly applicable EU legislation will be amended to reflect the onshored version of that legislation.

The general approach will not, however, be without exceptions. In particular, HM Treasury propose to provide the UK financial services regulators, namely the BoE, the PRA and the Financial Conduct Authority (FCA) with temporary transitional powers and allow them to offer transitional relief to all or certain categories of firms by waiving or modifying regulatory requirements. You can read more about these transitional powers here.

According to the Consultation Package, firms and FMIs will not be required to implement any changes before exit day. To this end, transitional relief will, in the first instance, be granted to firms in order to delay the application of onshoring changes that would otherwise require the relevant entities to take action before exit day. Consequently:

  • It will still be possible to treat EU exposures and assets preferentially for the purposes of calculating capital and liquidity requirements as well as large exposures.
  • Regulatory data shall be disclosed under the same conditions.
  • UK groups that are part of EEA headquarted banking groups will not need to comply with consolidated liquidity requirements at UK level.

However, PRA will not grant transitional relief with regards to:

  • contractual recognition of bail-in;
  • contractual stays in resolution; and
  • changes in the scope of the protection under the Financial Services Compensation Scheme (FSCS).

Approach to EU Guidelines and Recommendations After exit day, HM Treasury will not be under any obligation to comply with EU Guidelines and Recommendations. However, these instruments will remain relevant for firms and FMIs as well as the BoE and the PRA, when assessing compliance with the regulatory requirements of the onshored version of EU legislation. This will not be the case for EU Guidelines and Recommendations that the BoE and PRA do not intend to comply with and have informed EU authorities accordingly. The BoE will not be making specific changes to these instruments, but expects firms and FMIs to interpret and comply with them in light of the UK withdrawal to the extent they remain relevant. To facilitate this process, the BoE also provided a non-exhaustive list of EU Guidelines and Recommendations currently applicable in the UK, as well as a non-exhaustive list of EU Guidelines and Recommendations that the UK does not intend to comply with after exit day.

Approach to PRA-regulated banks, building societies and designated investment firms

Contractual recognition of bail-in and stay in resolution To ensure resolution efficiency, when liabilities are governed by the law of a third country, the parties must agree that the BoE, in its capacity as the resolution authority, has the power to bail-in the relevant liability. Additionally, financial arrangements governed by the law of a third country must provide that a firm entering into resolution does not in itself trigger termination rights.

The PRA does not propose that EEA law governed liabilities or financial arrangements that were created or entered into before exit day need to be amended. In any case, the BoE may use its power to direct the firm to renegotiate the terms in specific cases where existing EEA law governed liabilities or financial arrangements constitute a substantive impediment to resolution.

Risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty As a result of the general approach, parties may be required to redraft bilateral arrangements and amend arrangements in respect of collateral for Over-The-Counter (OTC) derivatives that are not cleared by a Central Counterparty (CCP).

A temporary regime will be put in place for certain intragroup exemptions in the onshored European Market Infrastructure Regulation (EMIR). It is also noted that firms should plan on the assumption that requirements arising from new EU legislation that comes into effect during an implementation period would apply to them.

Ring-Fenced Bodies Ringed-Fenced Bodies (RFBs) will be permitted to continue operating through a branch or a subsidiary in the EEA immediately after exit day. RFBs using non-UK CCPs or Central Securities Depositories (CSDs) shall ensure comparable outcomes in respect of account segregation to those specified for UK-based CCPs and CSDs.

Temporary Permissions Regime for inbound EEA firms and FMIs

Firms authorised to passport into the UK before exit day are eligible to enter the TPR. To do so they must inform the PRA before exit day either by submitting an application for authorisation as a branch or through the notification process that will be available on the FCA’s website (Connect system) from early 2019. Firms in the TPR will obtain a ‘deemed permission’ to continue carrying out the same activities as before exit day.

In general, the PRA proposes the following TPR for EEA firms:

  • EEA firms entering the TPR will be considered and treated like third country firms.
  • EEA firms entering the TPR with a UK branch shall comply with the same rules that apply to other third country branches.
  • Cross-border service providers in the TPR with no branch in the UK shall comply with the rules that currently apply to PRA-authorised third country firms without a UK branch.
  • TPR firms shall comply with the same rules and will be supervised on the same basis as firms that are authorised under the Financial Services and Markets Act 2000 (FSMA).

We also note that EEA firms entering the TPR shall comply with the Senior Managers and Certification Regime rules, including third country UK branches in the TPR and cross-border service providers without a UK branch. In particular, they shall have one or more individuals approved to perform the Head of Overseas Branch Senior Management Function (SMF) as well as persons approved to perform additional SMFs where necessary. The PRA will also be granting ‘deemed approvals’ that will last for up to three years, in order to treat as approved an individual for whom an application has already been submitted. In particular, a firm will either need to submit a permission application along with a full SMF application before entering the TPR or it will need to complete a TPR SMF application, which will include a short Statement of Responsibilities, while in the TPR. Firms will be granted with a period of up to 12 weeks after exit day to seek deemed or full approvals for individuals as necessary.

Approach to FSCS protection

The PRA is also putting forward the following proposals with regards to the FSCS protection for depositors. More specifically:

  • From exit day, FSCS depositor protection will only cover depositors with eligible deposits held by UK establishments of FSMA authorised deposit-takers, regardless of whether deposits are held by a UK branch or a UK subsidiary. EEA firms that become authorised or enter the TPR after exit day will become part of the FSCS and will be expected to comply with the relevant rules.
  • Deposits held by UK firms’ branches in the EEA will not be covered by the FSCS after exit day.
  • Firms shall adhere to notification and disclosure requirements to depositors regarding changes to their depositor protection.

No transitional relief will be granted with respect to these changes. As a result, firms will need to comply with the relevant onshoring changes by exit day.

Approach to PRA non-binding materials and reporting and disclosure requirements

The PRA will not be making any detailed amendments at this stage to existing non-binding materials, including the PRA approach to documents, PRA Supervisory Statements and PRA Statements of Policy. Therefore, firms are expected to continue complying with them, but only to the extent that they remain relevant in light of the UK’s withdrawal from the EU and considering the relevant legislative changes. The PRA will only be updating the Supervisory Statement SS18/15 on “depositor and dormant account protection”, due to its complexity.

While no detailed amendments will be made to PRA reporting and disclosure requirements, information provided in the relevant reporting and disclosure templates may need to change in order to reflect the changes effected in the underlying regulatory requirements in light of Brexit.

The consultation period in respect of the above will remain open until 2 January 2019.