A quick summary

“Retained EU law” governing financial services will be revoked. But, with some exceptions, its substance will largely be retained and restated. Much of it will in future be set out in the rulebooks of the regulators (primarily the PRA and the FCA). This substantial revocation and restatement exercise will get under way once the Financial Services and Markets Bill 2022-23 (the Bill) is enacted. Its scale means that it is likely to take years to complete.

This briefing is based on the Bill as it stood at its second reading in the House of Commons on 7 September 2022. The Bill makes other changes to UK financial services regulation, not directly related to revocation and restatement of retained EU law, which are beyond the scope of this note.

Remind me what the current position is

While the UK was a member of the EU it was part of the EU regulatory system governing the single market. Some EU law was directly applicable in the UK, and in other cases the UK was obliged to enact its own laws to comply with EU directives. When the UK left the EU (and following the transition period) most of this would have fallen away, leaving large gaps in UK regulation. To avoid this, the European Union (Withdrawal) Act 2018 (EUWA) was enacted to retain this EU-derived law as UK law – hence the concept of “retained EU law”.

Much retained EU law effectively has the status of UK legislation. One consequence of this is that (aside from specific amending powers conferred on the Treasury by EUWA) it can be amended only by ordinary legislative processes. EUWA gave the Treasury (and in some cases the regulators) amending powers only for the very limited purpose of remedying “deficiencies”, so as to ensure it still functioned effectively now that the UK was no longer an EU member.

How does the Treasury want to change this?

The Treasury wants to integrate retained EU law into the general regulatory framework established by the Financial Services and Markets Act 2000 (FSMA). FSMA envisages that detailed rules applicable to regulated firms are made by operationally independent regulators, with only the overall framework being established by the Treasury and Parliament. The Treasury therefore wants many aspects of retained EU law to be removed from legislation and put in regulators’ rulebooks instead.

Why?

The Treasury sees two main advantages in its proposals:

  • Rationalisation – They will simplify and rationalise the current fragmented patchwork of regulatory requirements, contained in domestic primary and secondary legislation, retained EU law of various kinds (as amended by Brexit SIs) and regulatory rulebooks.
  • Flexibility – Regulators will be able from time to time to amend regulatory requirements which can currently be amended only by the Treasury or Parliament, giving the regulators greater flexibility in pursuing their objectives. This will avoid a disproportionate burden on Parliamentary time, and ensure that responsibility for amendments is held by bodies with the greatest expertise.

What will be revoked exactly?

Swathes of retained EU law will be revoked, specifically:

  • all directly applicable principal EU legislation (such as “regulations”);
  • secondary legislation, including statutory instruments made under the European Communities Act 1972 implementing EU directives, and those made under EUWA correcting “deficiencies”;
  • EU tertiary legislation (delegated regulations, Community decisions and implementing acts); and
  • some primary legislation.

Most retained EU law that takes the form of primary legislation will not be revoked, but only those parts that will no longer operate effectively because of other revocations. Some secondary legislation will also remain, such as the Regulated Activities Order. And where secondary legislation has amended primary legislation, those amendments will remain in force. Retained EU law that already forms part of regulators’ rulebooks will not be revoked by the Bill, although it may be updated by the regulators themselves in the usual way.

How will restatement work?

Those parts of EU retained law which are revoked and relate to the general framework of regulation will be restated by the Treasury into either primary or secondary legislation. Anticipated examples are key definitions, regulators’ supervisory and enforcement powers, and “equivalence” regimes.

The regulators will be responsible for the restatement into their rulebooks of more detailed regulatory requirements applicable to firms carrying on regulated activities. They will be given some additional powers by the Treasury to enable them to do this. A significant example is powers to regulate a new category of “designated activities” (to be specified by the Treasury), so that certain activities carried on by unauthorised persons can be regulated in a manner proportionate to the risks of those activities – this is expected to be relevant for the restatement of retained EU law dealing with matters such as short-selling and derivatives.

Will retained EU law be changed when it is restated?

It seems likely that some changes will be made, but how extensive these will be is currently unclear. The Bill sets out a number of broadly-expressed purposes for which the Treasury may modify retained EU law when it restates it. The Treasury will retain these modification powers even after restatement.

Regulators may also modify retained EU law when they restate it in their rulebooks (and afterwards).

Will there be any consultation?

The Bill says nothing about consultation by the Treasury. But the regulators are generally required to consult on any amendments to their rulebooks and to produce a cost benefit analysis. The Treasury will, however, have power to exempt them from these requirements where retained EU law is to be restated without material changes, although it may not do so if it believes consultation is nevertheless appropriate.

When will all this happen?

The process of moving from retained EU law to a comprehensive FSMA model of regulation will be a significant undertaking likely to take several years. It will involve a large-scale programme of secondary legislation, similar to the exercise conducted at the end of the Brexit transition period, together with extensive rule-making by the regulators.

The process will take place in stages, on a “file-by-file” basis. Legislative and rulebook changes will proceed in tandem – for each file, the Treasury will only revoke the retained EU law as and when the regulators have drafted and consulted on the corresponding new rules.

The Bill itself may take several months to complete its passage through Parliament, and revocation and restatement cannot begin until it is enacted. However, the Treasury is already working with the regulators on the programme and intends to set out further information, including on file prioritisation, in the due course.

Are there any transitional arrangements?

Yes. The Bill itself makes a number of changes to the retained EU law versions of the MiFID II framework (to implement conclusions of the Wholesale Markets Review) and the Securitisation Regulation (the nature of these changes is beyond the scope of this note).

More generally, the Bill will give the Treasury a broad power to amend retained EU law before it is revoked. This may be exercised for the same range of purposes as those applicable to amendments made at restatement (see above). It is much wider than the “deficiency”-correcting power conferred by EUWA.

Will anything really change for regulated firms?

The creation of a body of “retained EU law” at the end of the Brexit transition period was always intended to be a stopgap, pending a more considered integration of the EU regulatory legacy into the UK regulatory framework. The approach now being adopted by the Treasury is intended to result in a more coherent and agile UK regulatory regime, and one that is easier for firms to navigate. However, extensive, piecemeal amendments could make FSMA itself more of a patchwork than ever.

Revocation and restatement would not of itself really change much for firms in practical terms. But the extent to which the regulators, in particular, may seek to change other aspects of retained EU law when they restate it in their rulebooks is currently unclear. Certainly, some changes in terminology and organisation of the text can be expected in order to create coherent and user-friendly rulebooks, but so far the regulators have not indicated that they are envisaging major changes of policy as part of the restatement process. The changes being made by the Bill itself to the MiFID II framework and the Securitisation Regulation will, of course, be significant.

Other changes being made in the Bill, beyond the scope of this note, such as amendments to the regulators’ objectives and accountability framework, may also be significant for firms in the medium to longer term.