During a week of high politics in Westminster (outside the scope of these updates), the House of Commons (“HoC”) Scrutiny Committee (“SC”) published their 50th report (see Document 1 below). This looked at various EU legislative proposals in financial services (FS) – prudential requirements for investment firms (a proposed regulation and directive amending the MiFIR /MiFID regime on the prudential requirements for supervision of investment firms), and a package of risk reduction measures (RRM) in banking (proposed directives and a regulation amending the CRD /CRR and BRRD regimes). (The SC also comments briefly on the proposed legislation on crowdfunding platforms; the SC is concerned about the changes introduced by a majority of member states to introduce minimum harmonisation requirements for crowdfunding platforms including those operating domestically. The original proposal was for an optional quality label for those operating cross border.)
The SC report covers the now familiar analysis of how EU legislation will impact the UK in the context of Brexit – during the transitional period (TP) under the Withdrawal Agreement (WA) (when the UK has to follow new EU law but will no longer have voting rights in the legislative process) and when the UK leaves the single market and becomes a third country under EU law (which would occur on exit under the no deal scenario or at the end of the TP under the WA). In this context, the SC expresses concern about the Financial Services (Implementation of Legislation) Bill, on which we reported in our previous update. This would enable the UK Government (“HMG”) to implement various EU FS legislation (so called ‘in-flight’ legislation) in a no deal scenario after the UK had left the EU (when there would no longer be any obligation on the UK to do so). HMG would adopt and modify the EU legislation by statutory instrument and would not need to secure primary legislation. The powers will last for 2 years after exit. The SC is concerned that the list of in-flight legislation includes proposals which will not have been finalised by 29/3/19 and so the final form will not be known at that stage and could diverge from current drafts, particularly when the UK has lost its voting rights.
The SC is also concerned about the pressure on the UK to maintain new (as well as existing) EU regulation after the UK leaves the single market in order to achieve/maintain equivalent status under third country provisions – ‘….relying on equivalence to preserve UK-EU trade flows in financial services in any event carries the risk that the UK could become a de facto rule-taker in some areas, to avoid losing more market access.’ It seems to fear that HMG might be under pressure to adopt in flight legislation without Parliamentary approval for this purpose.
The RRMs include the controversial requirement for third country banks with large-scale operations in the EU to maintain an intermediate parent undertaking (“IPU”) in the EU. The IPU proposal was opposed by the UK because of the impact on UK banks when the UK leaves the single market. The remaining member states, however, have pressed ahead and reached agreement with the European Parliament - ‘the IPU obligation would apply to non-EU banks with assets in excess of €40 billion (£36 billion) within the EU, and take effect three years after the new Capital Requirements Regulation becomes applicable (i.e. in 2022). The Minister says the final outcome “significantly increases the proportionality and operability of the measure”, although it would still affect a sizable number of UK-based institutions following Brexit.’
Our previous update looked at the proposed changes (under the prudential changes to MiFIR/MiFID mentioned above) to the third country passport for mode 1 investment business. Our update referenced previous SC analysis and looked at the recently published text as amended by the Council. The latest SC report repeats previous concerns but appears to have been completed before publication of the Council text.
In an article in the Financial Times, Lord Hill expressed doubts about the UK seeking an EEA/Norway style relationship with the EU. He found, when EU Commissioner for FS, that EEA states had minimal influence on EU legislation. He shared the concerns of the UK regulators about regulating the City of London (and the large risks involved) on a pure ‘rule taker’ basis. The Norwegian government reporton their EEA membership highlighted the unique nature of the EEA:
“The core of the Norwegian “model” of participation in the European integration process is in other words integration without co-determination. […] This is a very unusual and special form of international cooperation. It is normal that states are members of the organisations with whose rules they conform. That a state associates itself to an organisation of which it is not a member, commits itself to “dynamic and homogenous” development with it, and continually incorporates large parts of the regulation that it adopts, is an otherwise unknown phenomenon in international politics”
The FT has also raised questions about HMG’s progress in agreeing replacement FTAs with third countries to cover a no deal Brexit. Details of the recently announced UK/Swiss agreement are still not public nor is there any information about the UK/Australia ‘mutual recognition pact’. Whilst the press focuses on the progress of replacing FTAs, there is even less reporting/public information about HMG’s progress in maintaining/rolling over DRC arrangements in FS where the beneficial treatment of UK firms in a third country is currently dependent on UK status as an EU member state. We have highlighted this issue in previous updates, most recently in relation the ISDA report on CFTC equivalence determinations in the US and the need for US regulators to take action to roll over/apply current treatment to cover the UK when it ceases to be an EU member.