Brexit update for financial services firms - week ending 5 October 2018

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The week in outline:

In his speech on Friday (see Document 1 below), Donald Tusk repeated the offer of a ‘Canada+++’ treaty with the UK. This was widely reported in the UK press in the context of the debate at the Conservative Party conference about alternatives to the Chequers/White Paper proposals. Tusk said nothing specifically about financial services (FS). ‘Canada+++’ would represent a very different approach in the goods sector but the less ambitious ‘dual regulation coordination’ (DRC) proposals for FS in Chequers could presumably operate under either model.

There were two speeches from EU FS regulators (see Documents 2 and 3 below) touching on two key aspects of EU Brexit policy which we have considered in previous updates –

  • the EU’s development of its third country arrangements in FS to take account of Brexit. These arrangements are to be the basis for DRC[1] under EU and UK proposals for the future relationship/agreed deal when the UK leaves the single market at the end of the transitional period on 31/12/20. They would also be the basis if there was ‘no-deal’, although in that case, there could be a considerable delay after exit on 29/3/19 before EU equivalence decisions for the UK are in place.
  • the lack of legislative/regulatory measures on the EU side for a ‘no-deal’ scenario, particularly the absence of transitional relief (in contrast to the extensive transitional relief for EU/EEA firms which the UK is implementing under section 8 of the European Union Withdrawal Act 2018 (EUWA).

There are a number of different policy objectives and potential outcomes in the first of these areas. As we explained in our April 2017 report, the EU’s current equivalence measures are patchy across FS sectors/lines of business. Some of the debate in the UK has overstated the extent to which these measures provide market access for third country firms. A European Commission Staff Working Document described third country equivalence decisions thus – “Equivalence decisions in a few areas may enhance the possibilities of doing business in the EU (e.g. investment firms under MiFID II), but the equivalence as such primarily serves prudential regulatory purposes” (e.g. to provide a less burdensome capital treatment for EU financial institutions’ exposures to an equivalent third county) and “is a tool to reduce overlaps in compliance in the interests of EU markets”. In practice, third country market access remains a somewhat un-harmonised area which largely depends on the perimeter and regulatory rules of individual member states.

The UK White Paper/Chequers plan seeks to persuade the EU to amend its FS legislation to add new equivalence-based measures which give greater breadth of coverage for third country market access rights, on the basis that the UK, as a third country, would be able to take advantage of this extended sectoral coverage (given that it will at the outset maintain the full EU acquis and would therefore satisfy any equivalence requirement). The UK has abandoned its previous objective of securing preferential access for UK firms. Although the White Paper stated that its proposals for services would meet GATS Article V requirements for preferential treatment (and suggested bilateral treaty based structures for cooperation), the UK now accepts it would only be able to take advantage of DRC driven market access where EU legislation made this available to all equivalent third countries (and where equivalence decisions were made by the EU under its autonomous procedures).

The EU has not said anything in its initial response to Chequers about the possibility of extending the coverage of DRC market access. The UK has not given details of the broader sectoral coverage or the extent of DRC access that it is seeking, and it is difficult to assess how far the EU may go. Negotiation of the specific FS arrangements is not expected to start until after Brexit on 29/3/19, so this is some way off. So far the EU has taken a tough line on FS and the UK itself is now seeking more limited DRC driven access in FS. We believe that the EU will also be mindful that any extended DRC coverage will potentially be available to other third countries but the idea of extending DRC in some areas may appeal to the EU. First, it may well see benefits for EU markets, particularly in the immediate period after the UK leaves the Single Market, in extending DRC equivalence based access for wholesale business in additional FS sectors and activities. It may also wish to be in a position to reduce or tighten access conditions in the medium term (for example as cross-integration/dependence decreases over time and the EU becomes less dependent on the City of London). Secondly, the EU would thus take the issue of third county market access away from member states and control it at EU level. Harmonisation in these areas would prevent member states from having differing domestic measures and would preclude competition between states to offer greater access to the UK and special deals between the UK and individual member states. In the speech this week, ESMA has again[2] advocated an additional third country regime for trading venues (in addition to the MiFID II investment services passport/DRC for third country firms).

Other aspects of the EU’s review of third country measures for Brexit are less welcome to the UK. EMIR 2 shows how the EU can decide at will to restrict equivalence-based DRC for third country firms. It is also looking to tighten its equivalence assessments with more granular requirements, where Steven Maijoor welcomed the increased role for ESMA in relation to third countries under the Commission’s ESA proposal[3]

Maijoor said that EU-27 national regulators/the ESAs should enter into MOUs with the UK regulators as part of the no-deal contingency planning. He also advocated transitional provisions under EMIR 2.2 for UK CCP access (which would presumably match the UK’s temporary recognition regime under section 8 EUWA for EU/EEA CCPs – see our update for the week ending 27 July).The speeches were seen as a welcome recognition by the EU that transitional measures (on the EU side) would be desirable as part of the contingency planning for a ‘no-deal’ scenario. We believe it is too early to conclude that the EU will take a more pragmatic and less hard-line approach to help UK firms. There was no reference to a general policy to provide transitional relief on a similar basis to the UK measures.

On both issues above, the speakers were careful to limit their remarks without making any firm or broad policy statements. The specific measures that they proposed are clearly driven by concerns within EU-27 markets. On 5th October the Financial Times reported that the EU would shortly announce its no-deal legislation and that this was expected to maintain its hard line on FS. On that basis, the EU would not be expected to offer (at this stage) an equivalent (for UK firms) to the broad temporary permissions regime which the UK is adopting for EEA firms (see our update of the week ending 27 July 2018).

1.EC Statement by Donald Tusk

Test of Donald Tusk’s statement following his meeting with Leo Varadkar on 4 October 2018 follows. The full text can be accessed here.

“Let me make this clear: the EU wants a relationship with the UK that is as close and special as possible. From the very beginning, the EU offer has been not just a Canada deal, but a Canada+++ deal. Much further-reaching on trade, on internal security and on foreign policy cooperation. This is a true measure of respect. And this offer remains in place.”

2.ESMA: Speech by Steven Maijoor: The State of Implementation of MIFID II and preparing for BREXIT

Text of this speech, given on 3 October 2018 follows, in which Steven Maijoor discusses various aspects of MiFID II and ESMA's plans in relation to Brexit. He notes: "in the case of a no deal Brexit, NCAs and ESMA should have in place with our UK counterparts the type of MOUs that we have with a large number of third country regulators … we plan to start negotiations with the UK FCA with the objective to have these MOUs in place sufficiently on time before the end of March 2019". The full text of the speech can be accessed here.

“The prospect of a very large financial market moving out of the EU, while likely continuing to be very interconnected with the EU financial markets, has triggered a reconsideration of our third country arrangements. In that context, I welcome the increased responsibility entrusted to ESMA vis-à-vis third countries in the Commission’s legislative proposal under the ESAs’ review. However, although this is an important development, there remain other areas where we need improved third-country arrangements.

I would mention in particular the need for a comprehensive and harmonised EU regime for third-country trading venues. MiFID II leaves substantial national discretion with very diverse regimes currently in place. A harmonised third country regime would contribute to a level playing field between EU and non-EU trading venues and mitigate risks related to orderly markets, investor protection and ultimately stability. In my view, such regime should:

  • (1)cover all types of trading venues;
  • (2)cover in one equivalence decision all purposes for which they would need to be recognized (e.g., placing of trading screen, post-trade transparency, and trading obligations);
  • (3)ensure that third country trading venues accessing the EU comply with requirements that are equivalent to those for EU trading venues; and
  • (4)establish one point of entrance to the EU with effective supervisory tools.”


“A no deal Brexit will not only result in UK market participants losing their passports for EU access, there will also be no legal basis anymore for the extensive and granular daily data exchange between the UK and the EU27 which takes place under MIFIDII. This data exchange goes far beyond the type of data exchange we typically have with third countries.
As explained in the first part of my speech, the MiFID II framework relies on a number of calculations to be performed at EU level, such as the double volume cap, the transparency regime for equity and non-equity instruments, including the liquidity assessment and the large scale or block size applicable to those instruments. Given the importance of the UK financial market within the EU, a no deal Brexit would affect those MIFID II calibrations and may trigger some significant effects.
ESMA is currently working to identify those effects that may arise from a no deal Brexit and to find the most efficient way to limit the impact for EU27 financial markets. While recognising that our respective financial markets will remain strongly interconnected, we need to avoid less effective regulation and supervision and a negative impact on the level playing field. We are considering all potential available tools to do so, including ESMA guidance and potential proposals for legislative amendments.”


“The current legislative framework of EMIR does not allow ESMA to recognise CCPs based in the UK as third-country CCPs as long as it is an EU Member State. This legal obstacle results in a situation where EU Clearing Members, and EU trading venues, are uncertain about the continued access to EMIR-recognised CCPs. To respond to those risks to the stability of EU financial markets, in my view we need to ensure continued access to UK CCPs for EU clearing members and trading venues. Such continued access is in line with the EMIR 2.2 proposal which allows, under certain conditions, systemically important CCPs (Tier 2 CCPs) and non-systematically important CCPs (Tier 1 CCPs) from third countries to provide services in the Union.
So, I would support a swift conclusion of the EMIR 2.2 legislative file, complemented by a transitional provision allowing for the continued access to UK-based CCPs, subject to conditions ensuring that UK CCPs continue to comply with EMIR requirements and colleges continue to monitor this compliance.
A final comment that I would like to make is not only relevant for trading and central clearing, but generally for supervision and enforcement in securities markets. In the case of a no deal Brexit, NCAs and ESMA should have in place with our UK counterparts the type of MOUs that we have with a large number of third country regulators. These MOUs are essential to meet our regulatory objectives and allow information exchange for effective supervision and enforcement, for example for market abuse cases. ESMA has coordinated the preparations for such MOUs together with the EU27 NCAs. Taking the wider negotiations between the EU and UK into account, we plan to start negotiations with the UK FCA with the objective to have these MOUs in place sufficiently on time before the end of March 2019.”

3.ECB: Speech by Daniele Nouy: European Supervision in the Global Village

Text of this speech, given on 4 October 2018 follows in which Danièle Nouy considers aspects of European banking supervision, noting "we will also be ready to help ensure a smooth Brexit, no matter the outcome of the political negotiations". The full text of the speech can be accessed here.

“Of course, supervisors will not stand idly by, either. Our work must, and will, move forward on several fronts. Just to mention a few, among other priorities, we will continue our work on profitability, non-performing loans, the targeted review of internal models, governance and liquidity. We will also be ready to help ensure a smooth Brexit, no matter the outcome of the political negotiations. And we will prepare for newcomers; this means banks that may choose to relocate to the banking union, or countries that may want to join through close cooperation.

But one thing should be clear: crises cannot be ruled out. Thus, we need to further enhance our crisis management framework. We can start with early intervention measures. Here, we have to deal with an overlap between the early intervention measures provided for in the BRRD and supervisory measures provided for in the CRD IV and the SSM Regulation. This overlap hampers the use of these measures; it should be removed.”

4.FCA: Speech by Charles Randell: Rolling the Rick: The Cycle of Deregulation, Crisis and Regulation

Text of this speech, given on 2 October 2018 follows, in which Charles Randell considers aspects of regulation, including evidence based regulation; competitiveness amongst regulators and regulatory independence. He also states: "FCA does not see the UK’s withdrawal from the European Union as an opportunity to join a race to the bottom in regulatory standards – quite the contrary. We will need to redouble our engagement with our policymaking and regulatory colleagues in Europe and across the world, to continue to influence global standards of financial regulation ". The full speech can be accessed here.

“As last week’s IRSG Report on Global Regulatory Coherence within Financial Services rightly emphasises, strong global standards dampen the cycle of deregulation, crisis and regulation because they reduce the opportunity for individual jurisdictions to race to the bottom, and for firms to engage in regulatory arbitrage. Strong global standards also reinforce the competitiveness of the UK financial services sector.

This is most definitely not a zero sum game. Open and consistently regulated financial markets bring benefits to consumers and businesses in all jurisdictions. That’s why I believe that consumers and businesses across Europe will expect to have continued access to the best financial services that are available in their time zone, maximising their own welfare and the potential of their nations’ economies.”

Other publications from the RegZone Brexit news feed

FMLC: Data protection

FMLC's paper considers issues of legal uncertainty potentially hindering the continuation of the lawful flow of personal data between the UK, EEA and/or third countries following Brexit, and on the framework and mechanics for supervision and enforcement of the data protection regimes post-Brexit. The full paper can be accessed here.

The Consumer Credit (Amendment) (EU Exit) Regulations 2018/1038

This SI is being made in order to address deficiencies in retained EU law in relation to consumer credit arising from Brexit. They amend the Consumer Credit Act 1974, the Consumer Credit (Disclosure of Information) Regulations 2010, the Consumer Credit (Green Deal) Regulations 2012 and the Financial Services Act 2012 (Consumer Credit) Order 2013. The SI can be accessed here.

The Friendly Societies (Amendment) (EU Exit) Regulations 2018/1039

This instrument is being made in order to address deficiencies in the Friendly Societies Act 1992 (c.40) and related subordinate legislation (the Friendly Societies (Accounts and Related Provisions) Regulations 1994) arising from Brexit. The SI can be accessed here.

ECB: Interview with Benoît Cœuré

ECB has published the text of an interview with Benoît Cœuré given on 19 September 2018. Topics include: cryptocurrencies, the Banking Union and Brexit. The interview can be accessed here.

CMS RegZone publishes weekly updates (available via email, on-line and via Twitter) on Brexit developments for financial services firms. These provide analysis and commentary on significant developments during the week in question. A daily digest of Brexit news (without analysis or commentary) is also available by email here and online via the RZ news wizard here(both of these can be filtered using the Brexit topic). Links to publications are contained in each update; publications released before the updates commenced in April 2018 can be found in a bibliography here. CMS RegZone publication ‘Where we stand’ provides an overview of the current position in a single report; this is updated regularly to take account of the key developments from the weekly updates.

[1]Dual recognition coordination (DRC) is explained in Chapter 1 of our April 2017 Report. DRC is a broad term to cover a variety of techniques such as “mutual recognition”, “home state recognition/supervision”, “deference”, “substituted compliance” and “passporting”.

[2]See our update for the week ending 29 June.

[3]See our commentary on the European Commission’s proposal in our update for the week ending 15 June 2018.