BrexitMar 4 2019

Financial services in the event of no-deal Brexit

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Financial services in the event of no-deal Brexit
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With the three-way stand-off between Westminster, Her Majesty's government and the EU still unresolved, the UK’s financial services sector is focused on the no-deal regulatory regime. 

The no-deal regime will involve far greater change for UK regulation than for the EU 27.

For continuing members, a state leaving the EU is much like a state joining on accession but in reverse. 

UK regulation must first undergo the onshoring process and modification under statutory instruments (SIs).

Andrew Bailey, chief executive of the Financial Conduct Authority, explained that the onshoring process, which is due to be completed by the end of March, involved 62 SIs.

On the EU side, turning off passporting and other aspects of regulatory equivalence with the UK is an almost automatic outcome of the UK ceasing to be a member state.

There is then an extensive transitional regime under those SIs for European Economic Area firms with UK business that will be impacted by the turning-off of passporting under the single market, and on which their current operations rely.

Mr Bailey reminded the Treasury Select Committee that the onshoring process involved modifications where the ‘on-shored’ regulation was "inoperable" as a result of exit.

Recently, the FCA published a press release explaining how it would be using its temporary transitional power under the Financial Services and Markets Act 2000.

The press release said: "We intend to use this power broadly to ensure that firms and other regulated entities can generally continue to comply with their regulatory obligations as they did before exit day for a temporary period.

"There are some areas where it would not be consistent with our statutory objectives to grant transitional relief. In these areas only, we expect firms and other regulated persons to begin preparing to comply with changed obligations now." 

The areas where firms need to prepare now for change on exit include: Mifid II transaction reporting; European Market Infrastructure Regulation, or EMIR, reporting obligations; issuer rules; contractual recognition of bail-in; short-selling notifications; use of credit ratings for regulatory purposes and securitisation.

The UK policy on transitional relief for incoming EEA firms is to be as helpful as possible to avoid forcing firms to restructure at an unnecessarily early stage. 

On the EU side, turning off passporting and other aspects of regulatory equivalence with the UK is an almost automatic outcome of the UK ceasing to be a member state.

The EU has a clear policy on transitional relief under the no-deal regime. This is the opposite to the UK; the EU’s no-deal regime will not assist incoming UK firms to make the transition after exit.

Despite the potentially very short notice should the withdrawal agreement fall, and therefore of the no-deal regime coming into effect, the EU has taken the position that UK firms must restructure in advance of exit in case the no-deal regime takes effect on March 29.

The EU has been able to maintain a unified position across member states; the no-deal regime transitional relief on the EU side is solely to protect EU 27 interests, and not to assist UK firms. 

Memoranda of understanding (MoUs) between UK and EU regulators will be an important part of the no-deal regime and have been under negotiation for some weeks.

The FCA and Esma have published two no-deal regime MoUs. The first is a multilateral MoU with EU and EEA national competent authorities covering supervisory cooperation, enforcement and information exchange.

The second is with Esma covering credit rating agencies and trade repositories.

The first MoU is critically important in the investment management sector. 

Two further Memoranda of Understandings for the no-deal regime have been concluded between Esma and the Bank of England. The MoUs concern the supervision of central counterparties (CCPs) and central securities depositories (CSD). 

The conclusion of the MoU for CCPs satisfies one of the four conditions for the recognition of UK CCPs. The others are a letter from the BoE confirming UK CCPs are subject to effective supervision and prudential requirements; that the UK is not on the list of third countries with deficient anti-money laundering financing regimes; and the adoption of ‘equivalence’ decisions recognising the UK regime for the regulation of CCPs.

The decision only applies in the context of the no-deal regime and is temporary in nature and time limited to 12 months. 

Esma emphasises that recognition is being granted in the context of the no-deal regime only to limit the risk of disruption in central clearing and to avoid any negative impact on financial stability.

EU transitional measures in financial services are not driven by a policy of assisting UK institutions to adjust to Brexit.

The EU’s member states have also been progressing their no-deal regime.

Many EU 27 states have now announced measures to protect resident policyholders with UK insurers; these would generally enable pre-exit insurance contracts to be performed despite the loss of the EU authorisation or passport on exit.

Paul Edmondson is a financial services partner at CMS