With the start of negotiations on the future EU/UK relationship, RegZone is launching a weekly update on Brexit developments for financial services firms. The weekly updates provide analysis and commentary on significant developments during the week in question. The updates will be supplemented by occasional thematic reports. A daily digest of Brexit news (without analysis or commentary) can be obtained by RegZone subscribers via the RZ daily news digest and news items are available online via the RZ news wizard here (both of these can be filtered using the Brexit topic).
ESAs: Joint Committee Risk Report
The Joint Committee of the European Supervisory Authorities has published its Spring 2018 Report on risks and vulnerabilities in the EU financial system. The report warns against key risks for EU financial markets, Brexit, asset repricing and cyber-attacks. Click here to access report.
On Brexit, the report concludes: “Uncertainties around the terms of the UK’s withdrawal from the EU still have the potential to expose the EU 27 and the UK to economic and financial instability and to weaken market confidence, in particular if negotiations end in a disorderly fashion. The absence of a conclusive agreement on the withdrawal terms could affect the legal framework for financial services and hence the continuity of financial contracts, as well as imply challenges for the operations of firms.”
The report has a chapter on the “risks related to the UK’s decision to withdraw from the EU”. This mainly repeats previous material from the ESAs (and reflects the highly political background in the midst of the EU/UK negotiations) - particularly the EBA, ESMA and EIOPA opinions last year which seek to harmonise (and perhaps stiffen) the response from national regulators on key issues relating to ‘UK entities/groups “seeking to establish or enhance their EU 27 presence in order to retain access to the Single Market” and in particular -
- Outsourcing of critical/important activities and delegation; and
- Authorisation/approvals, governance and risk management and on-going supervision.
Reference is also made to the question of contract continuity where the EIOPA opinion sought to place responsibility on insurers to ensure their ability post-Brexit to fulfil their pre-Brexit contracts. On derivatives the report highlights the risk of a “no-agreement scenario” with the following rather unhelpful commentary – “a potential period where UK CCPs are no longer authorised and are not recognised to operate in the EU. This might pose risks to market continuity, as financial flows could be disrupted and liquidity provided by UK-based counterparties could be affected. It might also challenge banks domiciled in the EU 27 through increased capital requirements for exposures to UK CCPs. These exposures are substantial, as UK CCPs currently act as clearing-houses for a large share of the derivatives trading activity of EU 27 parties.”
The report suggests that the level of Brexit driven relocations has been relatively low but is expected to increase.
FCA: Business Plan 2018/19
FCA’s Business Plan sets out key priorities for the coming year. With regard to cross-sector priorities: these include: work in relation to Brexit; culture and governance; high-cost credit; financial crime; data security, resilience and outsourcing; fintech/competition; the treatment of existing customers and long-term savings, pensions and intergenerational differences. With regard to sector specific priorities, FCA has set out details of its plans concerning wholesale financial markets; investment management; retail lending; pensions and retirement income; retail investments; retail banking and GI/protection. Alongside the Business Plan, FCA has also published sector views on all of these sectors based on the FCA’s view and data as at mid-2017. Click here for Business Plan.
The report has a separate and brief chapter on Brexit. It emphasises the extra resources being deployed for Brexit (costing an extra £16 million per annum - in addition to re-deployed resources). The main areas of activity for FCA are summarised under 4 headings:
- Working with the government – providing advice for the negotiations with the EU, on the UK’s domestic Brexit legislation, on impacts of Brexit on the FS industry and relations with EEA and other countries and the impact of the transition period. FCA is also reviewing its handbook in the light of the legislative changes which include “duty of care and the potential for greater use of automation”.
- Future functions – this section refers to previous announcements on steps planned to enable a smooth transition –
- HMT’s December 2017 statements on EEA firms and the proposed temporary permissions regime and
- The statement on giving FCA powers/roles in relation to UK and non-UK credit rating agencies and trade depositories. These are areas where there is currently significant regulatory responsibility at an EU level which may need to be “repatriated”.
- Supervision and risk - FCA refers to its work with firms on Brexit contingency planning, and its work on Brexit-related risk assessments.
- FCA’s operations – work on FCA’s systems and technology to achieve operational readiness.
- International cooperation – continuing work with both EU and non-EU authorities. On Brexit the report concludes: “Uncertainties around the terms of the UK’s withdrawal from the EU still have the potential to expose the EU27 and the UK to economic and financial instability and to weaken market confidence, in particular if negotiations end in a disorderly fashion. The absence of a conclusive agreement on the withdrawal terms could affect the legal framework for financial services and hence the continuity of financial contracts as well as imply challenges for the operations of firms.”
PRA: Business Plan 2018/19
PRA’s Business Plan sets out strategic goals for the coming year. These include: work in relation to Brexit; continuing to adapt to changes in the external market and to hold regulated firms, and those who run them, accountable for meeting PRA's standards; ensuring that firms are adequately capitalised and have sufficient liquidity; the development of supervision of operational resilience; resolution strategy and the facilitation of effective competition. Click here to access report.
The chief executive says that the foundation of PRA’s approach “remains the presumption that there will continue to be a high degree of supervisory cooperation between the UK and the EU, and that the openness of our global financial centre benefits both sides”. The report, which has a section on “Delivering a smooth transition as the UK withdraws from the EU”, says that PRA expects “the UK financial system to stay very large and it may, over time, become more complex as firms’ legal structures adapt to the new relationship. If not managed properly, this could reduce the visibility supervisors have over the overseas firms operating in the United Kingdom. This could place greater demands on supervision, and could pose challenges for effective resolution, which in turn requires deep supervisory cooperation”. “Effective engagement with our regulatory counterparts, in Europe and elsewhere, is an important part of this work to ensure that firms remain supervisable in preparation for, and after, EU withdrawal”.
The report refers to PRA’s work (much like FCA above) with the government, with firms’ contingency planning and the temporary permission regime for EEA firms. PRA says the scale of the authorisation task is significant and it encourages firms to discuss their plans with PRA. The regulator will also identify risks to its objectives of insurance policyholder protection and facilitating competition.
HoL: European Union (Withdrawal) Bill: Library Briefing
This House of Lords Library briefing has been prepared in advance of the report stage in the House of Lords of the European Union (Withdrawal) Bill, which starts on 18 April 2018. The briefing summarises areas of the Bill which the Government indicated during committee proceedings it would look at again. Click here to access briefing.
The most interesting areas from an FS perspective are perhaps chapter 4 on “retained EU law”, chapter 7 on post-exit judgments of the CJEU and chapter 8 on “delegated powers”.
ISDA's Brexit FAQs
The FAQs may be accessed here.
The ISDA FAQs are in two versions – the public/short read version and the long read available to ISDA members. They look at different Brexit scenarios and the topics include –
- Contractual points under ISDA documentation
- Access to the EU financial markets
- Bank Recovery and Resolution Directive
- Amendments to the ISDA Master Agreement and transfer of existing contracts
ISDA advises market participants to take independent legal advice on all of these issues.
Other publications from the RegZone Brexit news feed
C: Speech by Michel Barnier: Is Brexit a threat to the future of the EU's environment?
Text of this speech given by Michel Barnier may be accessed here.