Financial Regulation Horizon Report 2020
Whilst Brexit has impacted, if not dominated, much of the regulatory agenda for 2019, it has not resulted in regulatory paralysis. Brexit uncertainty still hangs over the horizon, but firms in the financial sector also need to remain responsive to a wide range of developing areas, from sustainable finance, fintech, LIBOR reform, and operational resilience to significant changes to regulatory capital and remuneration requirements.
Brexit once again dominated the political and regulatory agenda in 2019, culminating in a revised Withdrawal Agreement and Political Declaration. But the UK Parliament did not agree to the timetable for the bill which would have implemented the revised deal in the UK. So the Brexit deadline was extended for a third time to 31 January 2020, before which the outcome of the December UK General Election will determine what the next phase of the Brexit process looks like.
As the politics play out, there are still several routes that the Brexit process could take. One is the possibility of a â€œno dealâ€ Brexit at the end of January 2020 (subject to a further extension). Passporting between the EU and UK for financial services would stop, creating a potential licensing â€œcliff edgeâ€. However, the UK regulators have several no deal measures including a temporary permissions regime which would allow firms that passport into the UK on exit day to continue to carry on regulated activities for a period pending authorisation. Other measures would also be applied, such as transitional relief (i.e. waiver powers which may be applied by the UK regulators in some but not all cases where the effect of Brexit creates new obligations for firms) and contractual run-off regimes. Several EU27 Member States also have their own specific (more or less limited) transitional regimes in place to allow UK firms to continue servicing clients in their jurisdiction.
An alternative possibility is for the latest draft of the Withdrawal Agreement to be ratified in both the UK and EU Parliaments. In this scenario, the UK would officially leave the EU on 31 January 2020 but immediately enter a standstill transition period. During the transition, all rights and obligations of EU membership would continue. This means that
EU-UK passporting would continue, EU law would continue to be applied in the UK and new EU law would still be implemented in the UK.
In this case, the next key date would be 30 June 2020. This is the deadline under the Withdrawal Agreement for the EU and UK to decide whether to have a one-off extension of one or two years to the transition period.
As well as debating the merits of extending the transition, attention in 2020 will switch to agreeing an EU-UK free trade agreement. This is unlikely to have a direct impact on financial services. Of more importance to the sector will be agreeing equivalence where this is available under EU law and UK law. The Political Declaration envisages (optimistically) that the UK and EU shall â€œendeavourâ€ to complete equivalence assessments in financial services by 30 June 2020. However, the equivalence framework is patchy. For example, there is no equivalence for banking services under CRR.
If the Withdrawal Agreement is ratified, the end of the transition period (31 December 2020, 2021 or 2022, depending on whether the transition period is extended) would become the new cliff- edge deadline for financial services. Subject to anything to the contrary in a free trade agreement
or equivalence determinations, this is the point at which Brexit will actually crystallise for financial services. It is also the point at which a snapshot of EU law will become part of UK law and be amended by secondary legislation. Analysing the impact of the statutory instruments which fix â€œonshoredâ€ legislation will be a major undertaking for firms operating in the UK, as indeed it has been as firms were preparing for a â€œno dealâ€ Brexit during 2019. The impact of Brexit on specific areas of financial services legislation, and some of the complexities of onshoring relevant legislation in the UK, are mentioned in the rest of this report.
Further into the future, attention will turn to the potential divergence of UK and EU regimes. Andrew Bailey has spoken of a return to principles-based regulation with a focus on outcomes. In that respect, much will depend on how close a relationship the UK and EU27 will have and seek, and how this develops over time. Just as the EU will have power to deem the UK regulatory regime equivalent to the EU regime in certain areas, the UK Treasury will have power to deem the EU regulatory regime equivalent, and equivalence frameworks and assessments may change over time.
Our Brexit microsite, which collates our client publications
Our Brexit timeline
Our client notes on the new Withdrawal Agreement and Political Declaration
Our client note on the UK temporary permissions regime
Our client note on the UK regulatorsâ€™ Brexit approach and rules
Our client note on equivalence in financial services
Our Brexit webpage and Brexit SI tracker