On 28 February 2019, the Bank of England (BoE) and Prudential Regulation Authority (PRA) published a joint Policy Statement PS5/19 setting out the general approach they will follow in the event of a no-deal Brexit (Policy Statement). The Policy Statement sets out ‘near-final’ rules regarding the use of special transitional powers by UK regulators as well as the conversion of EU law into UK law, a process also known as ‘onshoring’.

The Policy Statement also provides feedback on a series of consultation papers published by the BoE and PRA in October 2018 (Consultation Package). You can read a summary of this Consultation Package and our relevant commentary here.

Use of transitional power

In the event of a no-deal Brexit, UK regulators, i.e. the BoE, the PRA and the Financial Conduct Authority (FCA), will be given special transitional powers. In particular, UK regulators will be able to grant firms temporary relief from a number of regulatory obligations, in order to minimise disruption and ensure a smooth transition.

In general, the BoE’s approach is to use its temporary powers broadly in order to delay the application of onshoring changes. This means that firms will not be required, as a rule, to take any action before exit day. According to the Policy Statement this transitional relief will be granted for a period of 15 months, with a possibility of further extension for up to 2 years. This will have a number of implications for firms. For instance, firms may continue to treat EU exposures and assets preferentially in the context of calculating their capital requirements for a limited time. Moreover, they will be able to use credit ratings issued by EU credit rating agencies, temporarily, and continue to rely on group recovery and resolution plans. In addition to this general approach, the PRA will also adopt a specific transitional provision in relation to bilateral margining under the European Market Infrastructure Regulation (EMIR).

It is important to note that there are a number of exceptions to the general use of the transitional power, which we have summarised below:

  • The Policy Statement confirmed the exceptions introduced as part of the Consultation Package. These relate to contractual stays in resolution, contractual recognition of bail-in as well as changes in the scope of the protection under the Financial Services Compensation Scheme (FSCS). Consequently, firms may need to take steps in this regard before exit day to ensure compliance.
  • The Policy Statement introduced some additional exceptions. Transitional relief will not be granted in cases where specific transitional provisions already exist, including temporary permissions and recognition regimes. Moreover, there will be specific exemptions with regards to PRA-regulated firms and financial markets infrastructures. Most importantly, with respect to the obligations around Simple, Transparent and Standardised (STS) securitisation as well as central counterparty obligations under the Markets in Financial Instruments Regulation (MiFIR) and the European Market Infrastructure Regulation (EMIR).
  • The Policy Statement also clarifies that the BoE and the PRA will not use their transitional powers with regards to onshored MiFIR and certain areas of EMIR, in cases where the same effect could be achieved by HM Treasury making an equivalence decision or equivalence direction.

‘Onshoring’ legislation

Broadly, the objective of ‘onshoring’ is to ensure a functioning UK regulatory regime from exit day, by adapting any existing EU laws to reflect the new position of the UK. In this regard, the BoE will be making only minor corrective changes to the draft instruments that were proposed under the Consultation Package. However, the PRA will be making a policy change with regards to the Senior Managers & Certification Regime (SMCR) in relation to firms that have entered a Temporary Permissions Regime (TPR). In particular, not all prescribed responsibilities for third country branches will apply to firms under the TPR. However, firms applying for Part 4A authorisation as a third-country branch will need to comply with a bespoke, new prescribed responsibility relating to the management of the process of obtaining such permission.

Next steps

The relevant statutory instruments, including those introducing special transitional powers for the UK regulators, are ‘near-final’, meaning the BoE does not intend to change policy or make significant alterations to the text as published. The BoE has confirmed that the transitional powers will enter into force on, and apply from, exit day.