The week in outline:

The headlines were dominated again by speculation about the fate of the Withdrawal Agreement (WA). The draft WA does not have specific provisions for the financial services (FS) sector. The key provision for FS is the proposed transitional period (TP) during which the UK would remain inside the Single Market after it leaves the EU. There were some press reports that the final UK/EU negotiations were likely to agree a mechanism in the WA for extending the TP beyond 31/12/20.

This week saw the release of a large number of relevant publications on the UK side (see the documents below). These included further (and extensive) material on the adaption of the FS regime under section 8 of the European Union (Withdrawal) Act 2018 (EUWA 18), as part of the UK’s contingency planning for a ‘no-deal’ exit on 29/3/19. Seven more draft SIs were published (see Documents 3 to 9 below) and the FCA has initiated two consultations on their preparations. The operation of the EUWA 2018 and SIs under section 8 has been explained in our previous update for the week ending 27 July 2018. A list of all SIs can be found here. If the WA is agreed, ratified and takes effect, the UK Government (HMG) plans to introduce the Withdrawal Agreement and Implementation Bill which will largely defer the on-shoring of retained EU law under the EUWA 18 and the changes under section 8. These could be held in reserve as contingency planning to cover a ‘no-deal’ scenario at the end of the TP, although they would need to be updated for changes to EU law and regulation in the intervening period. If everything goes to plan and the UK and EU reach a long-term agreement which is ratified and takes effect before the TP expires, the EUWA system of on-shoring and section 8 modifications may still be relevant because there now seems little prospect of the EU and UK agreeing bilateral DRC[1] to replace single market measures. According to the joint statement on 26 July 2018, DRC will only be granted by either side on an autonomous basis under their respective third country equivalence provisions.

FS law and regulation in the UK is already a complicated mix of EU derived measures and domestic provisions – each with its own hierarchy. The system will be far more complicated if and when the EUWA 2018 comes fully into force. The first FCA consultation contains over 700 pages of draft changes to the FCA Handbook and on-shored EU Binding Technical Standards (BTS); there will be further sets of changes from other UK regulators and the FCA will publish a second set in a later consultation. The section 8 SIs published by HM Treasury (HMT) are also voluminous. The MiFID SI (at Document 5 below) runs to 88 pages; it is not a restatement of the law but hundreds of individual amendments and additions. The SIs amend retained EU law – both ‘converted’ direct EU law, such as MiFIR, and ‘preserved’ EU law, such as the UK legislation which implemented EU directives such as MiFID – and also amend other relevant UK law such as Financial Services and Markets Act 2000 (FSMA). The EUWA 2018 has a complicated system for the interpretation of retained EU law, which varies according to the court involved and whether the provision has been modified or not. Another feature is that for cross-border work, lawyers will need to access both MiFIR as an EU regulation and an amended UK version of MiFIR as on-shored and amended under section 8.

Many of the SI changes are technical but one of the more interesting areas is the adaption of retained EU law on third country treatment. The SIs essentially reverse these provisions so that the UK has a mirror of the EU law; the UK will apply this measure to both non-EU/EEA countries and to EU/EEA countries. For the former, the EUWA 2018 will on-shore EU equivalence decisions, so that third countries will have the same status in the UK as in the EU.

For example, Swiss reinsurers will have the same equivalence based status in the UK as in the EU. Where there has been reciprocal treatment by the third countries in favour of the EU, this on-shoring of equivalence should assist the UK’s request for reciprocal treatment in favour of the UK to continue, despite the UK leaving the EU. Where equivalence grants some form of market access, third country firms may need to meet additional UK requirements to maintain access to the UK; for example, an investment firm taking advantage of the Article 46 MiFIR services ‘passport’ for wholesale business via registration with ESMA would also need to register with FCA to access the UK.

The mirror provisions will also enable the UK to offer reciprocity to the EU/EEA member states (which will be ‘third countries under the UK’s on-shored version of retained EU law such as MiFIR). Each side could grant identical equivalence decisions to the other and with identical benefits/access.

SIs under section 8 are also being used to introduce transitional measures for EU and EEA firms. The temporary permissions regime (TPR) has already been published – see our previous update for the week ending 27 July 2018. This week FCA published CP18/29: ‘Temporary permissions regime for inbound firms and funds’ (see Document 2 below). This provides further information on how the FCA expects the TPR to work in practice, how firms and funds can enter it, how long it will operate for, and how the rules proposed should apply to firms and fund marketing activities during the regime. The MiFID SI includes additional provisions relating to EEA firms operating in the UK under the TPR.

1. FCA: CP18/28: BREXIT: PROPOSED CHANGES TO THE HANDBOOK AND BINDING TECHNICAL STANDARDS - FIRST CONSULTATION

The FCA has published proposals on how it will amend the Handbook and EU derived Binding Technical Standards (BTS) if the UK leaves the EU without an implementation period in place. The proposed approach to EU non-legislative material such as Level 3 Guidelines and Q&As is also set out in the CP, along with the FCA's approach after Brexit to EU non-legislative material. Specific areas covered include: conduct of business rules; rules for UK funds and fund managers covered by EU fund management legislation; rules affecting other market participants, including UK investment firms covered under EU markets legislation; markets and financial market infrastructure; fund management; credit ratings agencies and trade repositories and short selling practices. Responses are required by 7 December 2018. The FCA intends to give feedback in early 2019 and publish final versions of these materials before exit day. It may publish further amendments to the proposals in this paper in later publications. The full paper can be accessed here.

“As set out in our statement of 27 June 2018, and following the announcement on 8 October, the Treasury has communicated that it will bring forward measures that will give the regulators some flexibility to phase in changes to firms’ regulatory requirements under the EUWA. We are willing to use these powers to waive or modify some requirements to allow for a smooth transition to the post-exit regulatory regime. This means we do not expect firms, regulated entities providing services within the UK’s regulatory remit and other stakeholders to prepare now to implement the changes from exit day. At the same time, we would be interested in views from stakeholders regarding any aspects of the proposed changes to firms’ regulatory requirements which might cause implementation challenges if the changes were to come into effect on exit day. We address this in Chapter 2.”

2. FCA: CP18/29: TEMPORARY PERMISSIONS REGIME FOR INBOUND FIRMS AND FUNDS

The FCA is consulting on how it expects the Temporary Permissions Regime (TPR) to work in practice, how firms and funds can enter it, how long it will operate for, and how the rules should apply to firms and fund marketing activities during the regime. It includes specific information on how the regime will operate for investment funds, how the regime will be funded and provides additional information for electronic money institutions, payment institutions and registered account information service providers. Responses are required by 7 December 2018. The consultation paper can be accessed here.

3. HMT: DRAFT SOLVENCY II AND INSURANCE (AMENDMENT ETC) (EU EXIT) REGULATIONS 2018

HMT has published a draft SI and an explanatory note with regard to proposed amendments to retained EU law related to Solvency II legislation in the UK, to be laid under the EU (Withdrawal) Act. The draft SI can be accessed here  and the explanatory note here.

“When the UK leaves the EU, the UK will no longer fall under the jurisdiction of the European Commission. To ensure that the Solvency II regime can continue to operate effectively in the UK, HM Treasury will take on the Commission’s function of making equivalence decisions for third country regimes, while the PRA will take on the role that EIOPA currently has for providing technical assessments of third country regimes.

Where the Commission has already taken equivalence decisions for third countries, these will be incorporated into UK law by the EU (Withdrawal) Act and will continue to apply to the UK’s regulatory and supervisory relationship with those third-countries.”

4. HMT: DRAFT BANK RECOVERY AND RESOLUTION AND MISCELLANEOUS PROVISIONS (AMENDMENT) (EU EXIT) REGULATIONS 2018

HMT has published a draft of the Regulations along with explanatory notes. HMT intends to lay this SI before Parliament in the autumn. The documents can be accessed here.

“The overall approach, in the unlikely scenario that the UK leaves the EU with no withdrawal agreement, is that the UK would treat EEA member states as it does other third countries. Broadly speaking for resolution policy, aligning the treatment for EEA states with that for ‘third countries’ will mean that EEA-led resolutions will be recognised in the UK, unless doing so is contrary to one or more statutory safeguards.

This means that once the UK leaves the EU, the same approach will apply to the recognition of EEA-led resolutions as currently applies to the recognition of third country resolutions. This is consistent with the UK’s G20 commitments and the FSB Key Attributes. In particular, the Key Attributes set out the need for transparent and expedited processes to give effect to foreign resolution measures.

Following EU withdrawal, the UK will retain (with amendments) its third country recognition framework and expand its scope to include EEA-led resolutions.”

5. HMT: DRAFT MARKETS IN FINANCIAL INSTRUMENTS (AMEDNMENT) (EU EXIT) REGULATIONS 2018

HMT has published a draft of the Regulations along with explanatory notes. HMT intends to lay this SI before Parliament in the autumn. The documents can be accessed here.

To ensure that the MiFID II equivalence regimes can continue to operate effectively in the UK, HM Treasury will take on the Commission’s function of making equivalence decisions for third-country regimes. Where the Commission has taken equivalence decisions for third-countries before exit day, these will be incorporated into UK law and will continue to apply to the UK’s regulatory and supervisory relationship with those third-countries.

[…]

As the EEA financial services ‘passporting’ system will be unworkable without a negotiated agreement with the EU, the Government is introducing a Temporary Permissions Regime (TPR), which is set out in the EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018. The TPR will enable relevant EEA firms and funds operating in the UK via a passport to continue their activities in the UK for a limited period after exit day and allow them to obtain UK authorisation or transfer business to a UK entity as necessary. This SI makes special provisions for EEA firms which intend to operate in the UK under the TPR by introducing the possibility of ‘substituted compliance’ in cases where not doing so could lead to conflicts of law. This means that a firm operating under the TPR will not be deemed in breach of the UK’s MiFID II rules if it can demonstrate that it complies with corresponding provisions in the EU’s MiFID II rules. Substituted compliance will not be available for all aspects of MiFID II. For example, it will not apply to those aspects of MiFID II where supervisory responsibility is reserved to the host state regulator, such as conduct of business obligations for branches. Finally, this SI disapplies certain requirements or rights for firms operating under the TPR which would be otherwise unworkable without a negotiated agreement with the EU. For example, EU trading venues in the TPR will not have the right to request access to a UK CCP in the way that a UK trading venue can do under the open access regime, unless an equivalence decision is made by HM Treasury relating to EU trading venues. 

[…]

In general, this SI provides that the EU is treated as a third-country. However, certain exceptions to this approach have been made to help provide for a smooth transition for market participants by maintaining existing outcomes as far as possible. These include the following exceptions:

  • UK firms will be able to treated Undertakings for Collective Investment in Transferable Securities (UCITS) in the EU as automatically non-complex instruments, so that they can, in general, continue to be sold to retail clients in the UK without a client undertaking an appropriate test.
  • energy forwards that must be physically settled and are traded on Organised Trading Facilities (OTFs) in the EU will continue to be excluded from the definition of financial instruments, to ensure there is no change in the requirements applied to UK market participants trading these instruments
  • the exemption from authorisation for commercial firms trading commodity derivatives, the ‘Ancillary Activities Exemption’ (AAE), which involves looking at a firm’s trading activity compared to overall trading activity in the market, will continue to be based on UK and EU market data. […]

This SI grants the FCA a set of temporary powers that will allow the FCA some flexibility over how the MiFID II transparency regime is operated during a transitional period of up to four years. The powers being granted to the FCA aim to preserve existing outcomes of the transparency regime as far as possible, while providing the FCA with the time required to operate the transparency regime when the UK is no longer a member of the EU.

6. DRAFT CREDIT TRANSFERS AND DIRECT DEBITS IN EURO (AMENDMENT) (EU EXIT) REGULATIONS 2018

 A draft SI and explanatory notes have been published and they can be accessed here.

7. HMT: DRAFT EU EXIT SIS FOR INVESTMENT FUNDS AND THEIR MANAGERS

 HMT has published drafts of the Alternative Investment Fund Managers (Amendment) (EU Exit) Regulations 2018 and the Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2018: along with explanatory notes. HMT intends to lay these SIs before Parliament in the autumn. The full publication can be accessed here.

Currently, the Alternative Investment Fund Managers Directive (AIFMD) defines an Alternative Investment Fund (AIF) as an investment fund that is not regulated at EU level by the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive. Consequently, all third country funds are therefore defined as AIFs.

This SI will amend the definition of an AIF meaning an AIF will be any investment fund that is not subject to the UK UCITS regime, which will mean all non-UK funds, including EEA UCITS, will therefore, be defined as AIFs.

Furthermore, to ensure that UK investors continue to have access to AIFs that are currently marketed in the UK, HMT announced that the temporary permissions regime will apply, enabling EEA funds and AIFMs that have notified the FCA of their intention to market in the UK post-Brexit to continue to access the UK market for a limited period after exit day.

8. HMT: DRAFT TRADE REPOSITORIES (AMENDMENT AND TRANSITIONAL PROVISION) (EU EXIT) REGULATIONS 2018

HMT has published a draft of the Regulations along with explanatory notes. HMT intends to lay this SI before Parliament in the autumn. The full publication can be accessed here..

9. DRAFT CONSUMER PROTECTION (ENFORCEMENT) (AMENDMENT ETC.) (EU EXIT) REGULATIONS 2018

A draft SI and explanatory notes have been published. The SI can be accessed here and the explanatory notes here

Other publications from the RegZone Brexit news feed

Department for Exiting the EU Statement by Dominic Raab

Text of Dominic Raab's statement to HoC on 9 October 2018 follows. The text can be accessed here.

TSC: Brexit Withdrawal Agreement

TSC has published correspondence to and from Philip Hammond, BoE and FCA following its request in June 2018 that they produce and publish an analysis of the impact of the Brexit Withdrawal Agreement and future framework, once it has been negotiated. TSC is now asking for further clarification from the regulators and has requested that its specialist advisor on this issue be granted permission to engage with HMT officials as part of his work. The letters can be accessed here.

Department for Exiting the EU: Joint Ministerial Committee (EU Negotiations) communiqué

A note of the 11 October 2018 meeting has been published. The note can be accessed here.

EC: Speech by Michel Barnier

Text of Michel Barnier's speech of 10 October 2018 follows. The text can be accessed here.

Draft Short Selling (Amendment) (EU Exit) Regulations 2018

A draft SI and explanatory notes have been published and they can be accessed here.

HMT: Regulations relating to the ESAs and ESRB

This sets out HMT’s approach to regulations relating to the ESAs and ESRB following Brexit. Where the EU (Withdrawal) Act incorporates directly applicable EU legislation related to the ESAs and ESRB into UK law, HMT will use statutory instruments under the Act to amend or revoke those provisions as necessary. The explanatory note can be accessed here.

Draft Electronic Money, Payment Services and Payment Systems (Amendment and Transitional Provisions) (EU Exit) Regulations 2018

A draft SI and explanatory notes have been published and they can be accessed here.

Draft Deposit Guarantee Scheme and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018

A draft SI and explanatory notes have been published and they can be accessed here.

HoC: Brexit questions in national and EU courts

This HoC library briefing paper considers issues that have been the subject of legal action in UK and EU courts. The full briefing paper can be accessed here.

FCA: Registering as a credit rating agency

FCA has published this webpage to advise firms on registering as a credit rating agency post-Brexit. The webpage can be accessed here.

HMT: Draft Credit Rating Agencies (Amendments etc.) (EU Exit) Regulations 2018 

HMT has published an explanatory note with regard to proposed amendments to retained EU law related to credit rating agencies, to be laid under the EU (Withdrawal) Act. The note can be accessed here.

BoE: FPC meeting

BoE has published a note of the FPC meeting held on 3 October 2018. Specific topics covered include risks to UK financial stability from Brexit. It notes: "FPC has been monitoring risks of disruption that could arise in the absence of an implementation period or any other agreement … There has been considerable progress in the UK to address these risks, but only limited progress in the EU. In the limited time remaining, it is not possible for companies on their own to mitigate fully the risks of disruption to cross-border financial services. The need for authorities to complete mitigating actions is now pressing". FPC also sets out its concerns over whether EU clearing members could continue to meet their ongoing obligations to UK CCPs and about the consequences for UK CCPs of continuing to provide services to the EU. The full note can be accessed here.

EIOPA: Statement by Gabriel Bernardino at ECON

Text of the statement given on 8 October 2018 follows. Topics include: supervisory convergence; Brexit; the Pan-European Personal Pension Product and cyber risk. The full text can be accessed here.

HMT: Proposal for a temporary transitional power to be exercised by UK regulators

The notes explain HMT's intention to provide the UK financial regulators with a temporary transitional power to phase in requirements for UK regulated firms that will change under onshoring legislation. The power will be delegated to UK regulators secondary legislation under the EU (Withdrawal) Act and will only be used in the no-deal scenario. The full proposal can be accessed here.

BoE: Stress testing

BoE has announced that the full annual stress test results will be published in the Financial Stability Report) on 5 December 2018. Due to Brexit preparations at BoE and at banks, FPC and PRC will delay the launch of the next biennial exploratory scenario to September 2019. The full publication can be accessed here.

HoC: Future trade with the EU: mutual recognition

This HoC library briefing paper considers the ways in which the term "mutual recognition" is used in the context of the UK's future relationship with the EU. The full briefing paper can be accessed here.

ESMA Statement by Steven Maijoor at ECON

Text of a statement given on 8 October 2018 follows. Topics include: MiFID II implementation; the Capital Markets Union and Brexit. The text of the statement can be accessed here and the annex to it here.

HoC: What if there's no Brexit deal?

This HoC library briefing considers at how such a situation might come about, the constitutional implications for the UK and the devolved administrations, and what the impact might be in a range of policy areas, including financial services. The full briefing paper can be accessed here.

FCA: Board minutes

FCA has now published the minutes of its 25/26 July 2018 board meeting.  Topics include: Brexit; SMCR; RBS GRG; assessing creditworthiness in consumer credit and SME access to FOS. The minutes can be accessed here.

ISDA Cliff edge effects under EU law in a no deal Brexit scenario

ISDA's paper considers why a "no deal" scenario has the potential to create a disruptive cliff-edge change in the EU regulatory requirements that apply to OTC derivatives business in a way that may adversely affect EU 27 or UK firms and their EU 27 and UK clients and counterparties. The full paper can be accessed here.