In outline: There was further progress on the ‘no deal’ regime in financial services (FS). FCA announced (see Document 4 below) the opening of the window for notifications to FCA for incoming EEA firms and funds to take advantage of the temporary permissions regime (TPR) (see our previous update commentary on the TPR here). The window will close on 28th March this year. It will not be possible to take advantage of the TPR if a notification has not been made by that date. Notifications are to be made via the Connect system. PRA also published a notice clarifying the proposed approach of both regulators to the application of the senior managers and certification regime (SM&CR) to firms in the TPR, particularly firms which have a UK branch and are dual regulated by PRA and FCA (see Document 4 below).
FCA has also opened advance applications for credit rating agencies (CRAs) and trade repositories (TRs) wishing to offer services in the UK after 29th March 2019 by registering a new UK entity or converting their ESMA registration into an FCA registration (see our previous commentary on the regime for CRAs and TRs here). EEA MiFID authorised data reporting services can also now notify and should do so by 15th February 2019 if they wish provide data services in the UK after 29/3/19.
As we explained in our last update, EEA firms that do not enter the TPR may need to take advantage of the financial services contracts regime (FSCR). FCA published a further consultation (CP19/2) on the detail of the FSCR (see Document 2 below). There was also further progress with the statutory regime for a no deal/NtA (see the new draft SIs at Documents 6 and 7 below). You can access our updated database of no deal legislation (EU and UK) here. As expected, UK Finance has submitted the formal application to the European Payment Council (EPC) for continued UK membership of SEPA (the Single European Payments Area). As explained in our previous update, SEPA membership is not limited to EU members and confirmation of the UK application is expected on 7th March.
The European Council announced the adoption of a position on the European Commission’s proposal for amendments to MiFIR and MiFID II (see Document 1 below). These include various changes to the MiFIR equivalence framework for third country firms. These measures are not therefore part of the EU’s no deal contingency plan and will (eventually) be relevant to UK firms whether the UK exits with or without the proposed Withdrawal Agreement. The changes involve tougher requirements for the third country investment business regime; these changes were a response to Brexit and to the UK’s future status as a third country vis-à-vis the EU. The original proposals were considered in detail in the HoC European Scrutiny Committee (the SC) report published on 16th March 2018 (see page 55 onwards re investment firm proposals). At the time of that report, HMG’s position was that the equivalence regime, and therefore the changes to toughen that regime, would not be relevant to UK firms after exit. This was because HMG was confident it would agree preferential access for UK firms under its ambitious economic partnership proposal and UK firms would not therefore have to rely upon sectoral equivalence provisions such as those in MiFIR’ . Of course, HMG subsequently abandoned their objective of preferential access in FS in the Chequers White Paper. This means that equivalence provisions will, indeed, be of great importance to UK firms, as the SC feared (for a more detailed analysis of the equivalence regime see our April 2017 report).
The MiFIR DRC equivalence framework is key to HMG’s revised policy for FS. Third country firms (TCFs) face broad prohibitions on mode 1 access (ie cross-border services supply). Without DRC arrangements, TCFs require local authorisation which is generally only available for a local branch (or subsidiary). The MiFIR framework involves equivalence-based DRC for investment business which provides TCFs from ‘equivalent’ third countries with a services/cross-border passport for mode 1 access to wholesale counterparties and ‘per se’ professional clients. It is based on home state regulation, with mere registration at the EU level.
Since the Chequers White Paper, when it abandoned preferential access, HMG has painted a picture that it could achieve extensive DRC based access for UK FS firms (without a UK-only arrangement) by persuading the EU to extend the sectoral ‘coverage’ of its DRC frameworks available to all equivalent third countries and making the EU’s current equivalence assessment and withdrawal processes more favourable to the UK. HMG has been reluctant to explain this new approach or to explore the prospects of success. HMG implied that if the EU provided a mode 1 passport for investment business under MiFIR, why not for banking (for lending, deposit taking and payments etc.) or insurance and reinsurance and so on? As we have explained in previous updates, the wording of the Political Declaration (PD) makes no reference to the EU opening up its FS market sectors to third country/mode 1 access (nor even to this being a UK objective/request). The PD wording is entirely consistent with the EU moving in the opposite direction, for example by restricting the current limited coverage of mode 1 access further and/or by raising the equivalence threshold/assessments to require closer alignment/mirroring of the EU rules. This is precisely the direction the EU is moving with its current Brexit driven review and reform of third counrty access under EMIR (see our previous update commentary on the EMIR 2 changes here) and now under MiFIR.
As the SC said on the latter (in relation to the original Commission proposal):
‘The Commission has now proposed to modify the conditions before equivalence can be granted, to take into account the concentration of Europe’s investment firms in the UK. Specifically, it wants to attach more stringent conditions to the equivalence process by requiring a “detailed and granular assessment” that also takes into account the third country’s “supervisory convergence”. However, the clear purpose is to give the Commission more leeway to reject the request or seek to put pressure on the UK to keep its regulatory regime for investment firm aligned with that of the EU after Brexit.’
The text as amended by the Council goes further. Like EMIR 2, it distinguishes the position of ‘systemically important’ TCFs and says the ‘Commission may, where appropriate, adopt equivalence decisions limited to specific services and activities or categories of services and activities’ and ‘may attach specific operational conditions […] that would ensure that ESMA and national competent authorities have the necessary tools to prevent regulatory arbitrage and monitor the activities of third-country investment firms’. These developments, to restrict UK/third country access and require closer alignment with EU rules, clearly run counter to HMG’s Chequers plan. The PD text does not contain the slightest hint that the EU might reverse the current policy/approach; it merely states that – “The Parties will keep their respective equivalence frameworks under review.” One has to wonder, given the direction of the EU’s current review, if HMG’s proposals for liberalisation are even still on the table for negotiation? Will the EU not adapt its frameworks autonomously to achieve its own policy objectives (as it is doing under the current review)? This is all a very long way from HMG’s confident reassurance to the FS sector early last year.
1. EC: PRUDENTIAL REQUIREMENTS OF INVESTMENT FIRMS
The Council's position on the proposed Regulation and Directive has been endorsed. It is noted that the Council text further strengthens the equivalence regime, as set out in MIFID/MIFIR, that would apply to third country investment firms and sets out in greater detail some of the requirements for giving them access to the single market and grants additional powers to the EC where the activities performed by third country firms are likely to be of systemic importance. The publication can be accessed here. “Until now, all investment firms have been subject to the same capital, liquidity and risk management rules as banks. The capital requirements regulation and directive (CRR/CRD4) are based on international standards intended for banks. They do not therefore fully take into account the specificities of investment firms.
On the basis of the text agreed today, investment firms would be subject to the same key measures, in particular as regards capital holdings, reporting, corporate governance and remuneration, but the set of requirements they would need to apply would be differentiated according to their size, nature and complexity.
The largest firms ("class 1") would be subject to the full banking prudential regime and would be supervised as credit institutions: Investment firms that provide "bank-like" services, such as dealing on own account or underwriting financial instruments, and whose consolidated assets exceed EUR 15 billion would automatically be subject to CRR/CRD4; Investment firms engaged in "bank-like" activities with consolidated assets between EUR 5 and 15 billion could be requested to apply CRR/CRD4 by their supervisory authority, in particular if the firm's size or activities would involve risks to financial stability. Smaller firms that are not considered systemic would enjoy a new bespoke regime with dedicated prudential requirements. These would, in general, be different from those applicable to banks, but competent authorities could continue applying banking requirements to certain firms, on a case by case basis, to avoid disrupting their business models. The text also provides for a 5year transitional period to give companies enough time to adapt to the new regime.
The Council text further strengthens the equivalence regime, as set out in MIFID2/MIFIR, that would apply to third country investment firms. It sets out in greater detail some of the requirements for giving them access to the single market and grants additional powers to the Commission. In particular, in case the activities performed by third country firms are likely to be of systemic importance, it allows the Commission to apply some specific operational conditions to an equivalence decision to ensure that ESMA and national competent authorities have the necessary tools to prevent regulatory arbitrage and monitor the activities of third country firms.”
2. FCA: CP19/2: BREXIT AND CONTRACTUAL CONTINUITY
This CP sets out details of the financial services contracts regime, which allows EEA firms to run off their regulated business in the UK, if the UK leaves the EU without an implementation period, and proposes rules to apply to firms during the regime. Responses are required by 29 January 2019. The consultation paper can be accessed here.
“To further reduce the risk of harm associated with an abrupt loss of permission on exit day, the Government have published draft legislation (the FSCR Regulations). This ensures that firms can still fulfil their existing contractual obligations in the UK for a limited period of time, even if they are outside the TPR following the UK’s withdrawal from the EU.
This CP should be read alongside the FSCR Regulations.
The FSCR Regulations will allow EEA firms that have pre-existing contracts in the UK which would require a permission to service to continue to carry on the relevant regulated activities in the UK for a limited period while in the FSCR. We must amend our Handbook to apply appropriate rules to firms in the FSCR for this UK business. We are consulting on the application of these rules in this CP.”
3. FCA: CP19/1: RECOVERING THE COSTS OF REGULATING SECURITISATION REPOSITORIES AFTER THE UK LEAVES THE EU
The CP sets out FCA's proposals for recovering the costs of regulation from securitisation repositories post-Brexit. FCA notes that it will communicate separately on authorisation and supervision of securitisation repositories shortly. Responses are required by 11 February 2019. The consultation can be accessed here.
“FSMA allows us to raise fees to recover our costs and our FEES manual sets out the detailed framework for calculating and collecting fees. ESMA’s fee-raising powers are set out in delegated regulations. The appropriate regulation has not yet been introduced for SRs’ fees and so our understanding of the likely fees structure is based on the technical advice ESMA gave the EU Commission in October 2018. We do not need to replicate their requirements because we propose to apply the standard provisions of our FEES manual to SRs. However, to maintain continuity and minimise disruption for the firms, which may continue to operate in the EU and be regulated by ESMA, we have tried to minimise divergence from ESMA’s proposed fees structure. Where we do diverge, we explain the reasons.”
4. FCA/PRA: TEMPORARY PERMISSIONS REGIME
FCA’s press release advises that the notification window for the temporary permissions regime is now open and sets out links to other pages and documents for firms (including a section specific to fund managers). PRA has published a note on the application of SM&CR to firms in the temporary permissions regime, including FAQs on how the two sets of proposals in PRA’s CP26/18 and FCA’s CP18/29 would apply to EEA branches. The FCA press release can be accessed here and the PRA note here.
“Firms will need to notify us that they wish to enter the temporary permissions regime using our Connect system. Fund managers will also need to notify us of which of their passported funds they wish to continue to market in the UK temporarily via Connect.
The notification window opens today (7 January 2019) and closes at the end of 28 March 2019. We have also published a guide for Connect covering the notification process for firms (PDF) and investment funds (PDF).
There will be no fee for notifying for the regime and firms and fund managers should not wait for confirmation of whether there will be an implementation period before they submit their notification.
Firms that have not submitted a notification will not be able to use the regime. Firms that do not notify us that they wish to use the temporary permissions regime will, where they meet the relevant conditions, be subject to the financial services contracts regime. We expect to consult on our approach to this regime shortly.
Once the notification window has closed, fund managers that have not submitted a notification for a fund will be unable to use the temporary permissions marketing regime for that fund. They will not be able to continue marketing that fund in the UK on the same basis as they did before exit day. The only exception to this is for new sub-funds of EEA UCITS that are in the temporary permissions marketing regime on exit day. It is possible for such new sub-funds to enter the temporary permissions marketing regime after exit day.”
5. FCA: ADVANCE APPLICATIONS FOR CREDIT RATING AGENCIES AND TRADE REPOSITORIES
FCA's press release notes that it has now opened applications for credit ratings agencies and trade repositories looking to offer services in the UK after 29 March 2019. In addition, EEA data reporting services providers authorised under MIFID should notify FCA if that they wish to provide data reporting services in the UK after exit day by 15 February 2019. The publication can be accessed here.
“We are continuing to prepare for a range of scenarios in relation to Brexit, including one in which the UK leaves the EU without a deal and without entering an implementation period.
In line with this, we have now opened advance applications from credit rating agencies (CRAs) and trade repositories (TRs) looking to offer services in the UK after 29 March 2019. CRAs and TRs looking to register a new UK entity or convert their ESMA registration into an FCA registration can find information on how to submit an advance application on our CRA and TR webpages.
Additionally, the window is now open for EEA data reporting services providers (DRSPs) authorised under MIFID to let us know that they wish to provide data reporting services in the UK after exit day. EEA DRSPs should notify us by 15 February 2019 and can find more information on how to notify us on the EEA DRSP webpages.”
6. HMT: DRAFT BENCHMARKS (AMENDMENT AND TRANSITIONAL PROVISION) (EU EXIT) REGULATIONS 2019
HMT has published the text of a draft SI, which will make amendments to retained EU law related to financial benchmarks, to be laid under the EU (Withdrawal) Act. The draft SI can be accessed hereand the explanatory notes here.
This SI will make amendments to retained EU law related to the BMR to ensure that it continues to operate effectively in the UK once the UK has left the EU.
UK-located benchmark administrators seeking authorisation or registration will continue to apply to the FCA. However, this SI:
- Clarifies that the scope of the onshored Regulation (and thus of authorisation or registration by the FCA) is the UK, and not the whole of the EU; and
- Ensures that EU located administrators are subject to the onshored third country regime, which requires third country administrators or benchmarks to become approved via recognition or endorsement applications to the FCA to allow use of their benchmarks in the UK by supervised entities (unless and until an equivalence determination is made).
7. HMT: DRAFT PUBLIC RECORD, DISCLOSURE OF INFORMATION AND CO-OPERATION (FINANCIAL SERVICES) (AMENDMENT) (EU EXIT) REGULATIONS 2019
HMT has published the draft text of a SI, which will make amendments to domestic legislation and retained EU law related to the framework for the disclosure of confidential information, to be laid under the EU (Withdrawal) Act 2018, along with an explanatory note. The draft SI can be accessed here and the explanatory notes here.
“In a no deal scenario, the UK would fall outside the EU’s common regulatory and supervisory framework for financial services. Given that many of the provisions in the existing domestic legislation assume that the UK is a member of the EU’s single market for financial services, parts of the Disclosure Regulations will become deficient when the UK withdraws from the EU. In particular, failure to amend the Disclosure Regulations would mean that the UK would continue to afford additional protections that only apply to EEA member states, which would be inappropriate once the UK is no longer part of the EU’s common regulatory and supervisory framework.
This SI does not intend to make substantive policy changes, but addresses these deficiencies to ensure that the legislation continues to operate effectively at the point of exit, and to reflect the UK’s new position outside the EU. Importantly, changes introduced by this SI will ensure that the UK continues to have robust protections for how the UK’s financial services regulators disclose confidential information with other regulatory and supervisory authorities.”