In outline:

During the two holiday weeks covered by this update, the flow of Brexit publications relevant to financial services (FS) continued – more than 17 documents are listed below. Publications from the House of Commons/Lords cover topics such as the EEA, the UK Government’s no deal preparations, the stability of the Union and whether the Withdrawal Agreement could be terminated under international law. These can be found in the “Other publications” section below.

With the ratification of the Withdrawal Agreement (WA) in doubt, the main focus has been on ‘no deal’ issues. In the UK, the progress of FS related NtA/onshoring statutory instruments (SIs) continued with the publication of updated material on the financial services contracts regime (FSCR) – with an updated explanatory memorandum and two SI drafts - the Financial Services Contracts (Transitional and Savings Provisions) (EU Exit) Regulations 2019 (see Document 4 below). These SIs amend earlier SIs to introduce the FSCR which provides run-off mechanisms to compliment several temporary/transitional regimes which the UK is adopting for incoming EEA firms, including those for payment and e-money institutions and for central counterparties and trade repositories. (See our previous commentary in last week’s update and the FCA publication on the FSCR at Document 4 of that update). The FSCR will allow EEA firms which are running off their UK business to continue to service pre-Brexit contracts after 29/3/19, even though they are not covered by one of the UK’s temporary/transitional permissions regimes.

The explanatory notes have separate annexes explaining how the FSCR will operate for different types of firm/institution – one of these relates to FS firms that currently passport into the UK under FSMA 2000 . These EEA firms will be able to obtain full authorisation through the Temporary Permission Regime (TPR), but those that do not do so will be able, under the FSCR, to ‘continue to carry out business to the extent necessary to run off pre-existing contractual obligations in the UK, but not to undertake new business’. Unlike the TPR, entry into the FSCR is automatic for firms that do not enter the TPR at all or those that leave the TPR without full UK authorisation. There will be two types of run off – supervised run-off (SRO) and contractual run-off (CRO). SRO will apply to firms that have a UK branch, that enter TPR but exit without authorisation and those holding pre-Brexit top-up permissions. The SRO will operate like the TPR in that firms will be deemed to have a Part 4A authorisation for the limited purposes of run-off. Other firms that operate under the services passport (and have not entered the TPR and do not hold top up permissions) will operate under CRO. The CRO does not involve authorisation/UK regulation; these firms will continue to be supervised by their home state and will be covered by a limited exemption (from the section 19 prohibition) to enable them to conduct run-off.

The FMLC published 2 reports (see Documents 2 and 3 below) raising issues on 2 pieces of ‘no deal’ legislation - the Financial Services (Implementation of Legislation) Bill (see our previous commentary here) and the MiFID NtA SI.

You can access our database of all FS legislation (both EU and UK) for a no deal scenario here.

Previous updates have covered the minimalist approach of the EU to transitional arrangements for a no deal scenario. In their December communication on implementing their no deal contingency plan, the EU announced two temporary and time limited equivalence decisions to cover central clearing services of UK central counterparties (CCPs) and, so called, notary and central maintenance services of central securities depositories (CSDs) - see our previous commentary here. The European Commission has now adopted these 2 equivalence decisions in the form of Implementing Decisions (see Document 1 below). They have time limits of 30 March 2020 for CCPs and 30th March 2021 for CSDs.

It is interesting to see that the EU has no difficulty, when it suits its policy objectives, in making equivalence decisions for the UK, whilst the UK is still an EU member (effective at exit if the WA is not in force). The decisions contain the normal review of the requirements for equivalence; these include equivalent regulation of UK CCPs/CSDs, the need for cooperation arrangements with the UK (the importance of which is emphasised in the decision recitals) and the need for UK law to contain a similar reciprocal recognition regime. On the first issue, the decisions note that the UK will have identical regulation as a result of the NtA/onshoring process under the European Union (Withdrawal) Act 2018. On the last point, the decisions note that the NtA/onshoring process has resulted in the UK having the same third country recognition regimes as the EU.

Given the UK's mirror of EU regulation at the point when it leaves the FS single market (either on exit or at the end of the WA transitional period), one might have thought that the EU would be obliged to have a full set of UK equivalence/recognition decisions in place at that point - see our April 2017 report for analysis of the EU’s equivalence assessment and decision making process. One would have thought that the UK satisfies all the equivalence requirements. As we explained in our previous update, however, the EU uses the possibility of granting, withdrawing or time-limiting equivalence decisions for broader political/negotiating objectives. As we explained, this issue has arisen in the context of the Swiss/EU negotiations, where the EU has now extended their equivalence/recognition decisions on Swiss trading venues but imposed a six-month time limit in order to maintain pressure on Switzerland to agree/ratify the new Swiss/EU institutional treaty – please click here to view the Commission’s press release of 17th December 2018. If the Swiss fail to agree the treaty, the EU says there will be no further extension/renewal.

The EU's tactics are very similar to its approach to the Brexit negotiations. With the exception of the two temporary decisions, it has refused to provide no deal equivalence decisions. The non-binding Political Declaration (PD) to accompany the WA (see the commentary in our previous update here) provides for the parties ‘endeavouring’ to complete equivalence assessments by the end of June 2020 (without any commitment as to the equivalence decisions themselves, when they would take effect or their duration etc.). In the context of a negotiated outcome – rather than a no deal scenario – this very vague commitment in a non-binding declaration seems a de minimis achievement by HMG (particularly given that this is the only commitment that HMG secured on DRC based access - and given that it had abandoned entirely its original objective of preferential access in FS). Another interesting aspect of the Swiss case (from a UK perspective) is that the EU has sought to assert objective grounds for their approach, namely that because of the close ties between EU and Swiss markets, reciprocity/equivalence is only appropriate if there is the strong institutional framework (as provided by the new treaty). The are obvious parallels with the UK position.