Brexit update for financial services firms - week ending 18 January 2019

United KingdomScotland

In outline:

During a week of high politics in Westminster (outside the scope of these updates), the House of Commons (“HoC”) Scrutiny Committee (“SC”) published their 50th report (see Document 1 below). This looked at various EU legislative proposals in financial services (FS) – prudential requirements for investment firms (a proposed regulation and directive amending the MiFIR /MiFID regime on the prudential requirements for supervision of investment firms), and a package of risk reduction measures (RRM) in banking (proposed directives and a regulation amending the CRD /CRR and BRRD regimes). (The SC also comments briefly on the proposed legislation on crowdfunding platforms; the SC is concerned about the changes introduced by a majority of member states to introduce minimum harmonisation requirements for crowdfunding platforms including those operating domestically. The original proposal was for an optional quality label for those operating cross border.)

The SC report covers the now familiar analysis of how EU legislation will impact the UK in the context of Brexit – during the transitional period (TP) under the Withdrawal Agreement (WA) (when the UK has to follow new EU law but will no longer have voting rights in the legislative process) and when the UK leaves the single market and becomes a third country under EU law (which would occur on exit under the no deal scenario or at the end of the TP under the WA). In this context, the SC expresses concern about the Financial Services (Implementation of Legislation) Bill, on which we reported in our previous update. This would enable the UK Government (“HMG”) to implement various EU FS legislation (so called ‘in-flight’ legislation) in a no deal scenario after the UK had left the EU (when there would no longer be any obligation on the UK to do so). HMG would adopt and modify the EU legislation by statutory instrument and would not need to secure primary legislation. The powers will last for 2 years after exit. The SC is concerned that the list of in-flight legislation includes proposals which will not have been finalised by 29/3/19 and so the final form will not be known at that stage and could perge from current drafts, particularly when the UK has lost its voting rights.

The SC is also concerned about the pressure on the UK to maintain new (as well as existing) EU regulation after the UK leaves the single market in order to achieve/maintain equivalent status under third country provisions – ‘….relying on equivalence to preserve UK-EU trade flows in financial services in any event carries the risk that the UK could become a de facto rule-taker in some areas, to avoid losing more market access.’ It seems to fear that HMG might be under pressure to adopt in flight legislation without Parliamentary approval for this purpose.

The RRMs include the controversial requirement for third country banks with large-scale operations in the EU to maintain an intermediate parent undertaking (“IPU”) in the EU. The IPU proposal was opposed by the UK because of the impact on UK banks when the UK leaves the single market. The remaining member states, however, have pressed ahead and reached agreement with the European Parliament - ‘the IPU obligation would apply to non-EU banks with assets in excess of €40 billion (£36 billion) within the EU, and take effect three years after the new Capital Requirements Regulation becomes applicable (i.e. in 2022). The Minister says the final outcome “significantly increases the proportionality and operability of the measure”, although it would still affect a sizable number of UK-based institutions following Brexit.’

Our previous update looked at the proposed changes (under the prudential changes to MiFIR/MiFID mentioned above) to the third country passport for mode 1 investment business. Our update referenced previous SC analysis and looked at the recently published text as amended by the Council. The latest SC report repeats previous concerns but appears to have been completed before publication of the Council text.

In an article in the Financial Times, Lord Hill expressed doubts about the UK seeking an EEA/Norway style relationship with the EU. He found, when EU Commissioner for FS, that EEA states had minimal influence on EU legislation. He shared the concerns of the UK regulators about regulating the City of London (and the large risks involved) on a pure ‘rule taker’ basis. The Norwegian government report on their EEA membership highlighted the unique nature of the EEA:

“The core of the Norwegian “model” of participation in the European integration process is in other words integration without co-determination. […] This is a very unusual and special form of international cooperation. It is normal that states are members of the organisations with whose rules they conform. That a state associates itself to an organisation of which it is not a member, commits itself to “dynamic and homogenous” development with it, and continually incorporates large parts of the regulation that it adopts, is an otherwise unknown phenomenon in international politics”

The FT has also raised questions about HMG’s progress in agreeing replacement FTAs with third countries to cover a no deal Brexit. Details of the recently announced UK/Swiss agreement are still not public nor is there any information about the UK/Australia ‘mutual recognition pact’. Whilst the press focuses on the progress of replacing FTAs, there is even less reporting/public information about HMG’s progress in maintaining/rolling over DRC arrangements in FS where the beneficial treatment of UK firms in a third country is currently dependent on UK status as an EU member state. We have highlighted this issue in previous updates, most recently in relation the ISDA report on CFTC equivalence determinations in the US and the need for US regulators to take action to roll over/apply current treatment to cover the UK when it ceases to be an EU member.

The new version of the RegZone “no-deal data base”has been updated and covers the various NtA SIs listed under ‘Other publications’ below.

1.HOC European Scrutiny Committee: 50th report of session 2017-19

Sections 2, 3, 4 and 10 of the report consider risk reduction measures in the light of banking reform; the EC proposals concerning prudential requirements for investment firms; improving cross-border law enforcement access to financial information and sustainability disclosure requirements for investment advisors and asset managers respectively and detail the latest ministerial responses to the Committee’s specific concerns. The first three matters are still under scrutiny by the Committee. The full report can be accessed here.

Banking reform: risk reduction measures

The European Commission tabled a technically complex package of proposals in November 2016 to update the EU’s prudential framework for banks. Known collectively as the “Risk Reduction Measures” (RRM), the proposals would bring the current legal framework—the Capital Requirements Directive and Regulation, and the Bank Recovery & Resolution Directive—in line with the most recent international standards.


In the context of the UK’s exit from the EU, the Government also opposed a proposed new requirement for large non-EU banks and investment firms with operations in more than one Member State to create an intermediate, independently-capitalised EU-based parent undertaking (IPU) to facilitate group supervision and resolution. This would have a direct impact on UK banks, whose operations within the Single Market would require a larger (and therefore more costly) presence in the EU after the UK loses its ‘passporting’ rights for financial services when it becomes a “third country” (either on 29 March 2019 or at the end of any subsequent post-Brexit transitional period).


The substance of the RRM measures, as provisionally agreed between the Parliament and the Council, is described in the next section. Whether this new EU legislation will have force of law in the UK will depend on whether the Withdrawal Agreement is ratified (in which case EU law would continue to supersede domestic law for the duration of a transitional period), and the timing of its formal adoption. We have set out our assessment of the potential implications of the RRM package for the UK banking industry in more detail in paragraphs 19 to 25 below.


The Risk Reduction Measures matter even in a ‘no deal’ scenario because of the recent Financial Services (Implementation of Legislation) Bill. Under this legislation, the Government has proposed to give itself the power to implement a limited number of pending EU proposals on financial services—including the RRM package—into UK law. This would be done by Statutory Instrument in the event of a ‘no deal’ (that is, even if the UK is no longer under an EU legal obligation to apply this legislation, and the provisions of the European Communities Act 1972 have been repealed). The power would exist for two years after ‘exit day’ (29 March 2019), and apply to the EU legislation within its scope irrespective of whether it is adopted at EU-level before or after ‘exit day’. This means that Parliament is being asked to preemptively grant the Government the power to implement European legislation which currently exists only in draft form. Moreover, the proposals covered by the Bill could be implemented domestically “with any adjustments the Treasury consider appropriate”. We note in this respect that the Bill could make it considerably easier for the Government to ensure the UK’s prudential regime for banks remains aligned with the EU’s to the extent necessary to obtain equivalence decisions after Brexit, as described above.

Prudential requirements for investment firms

Based on an Explanatory Memorandum submitted by the Treasury in early 2018, we described the substance and potential implications of the proposal in more detail in our initial Report of 28 February 2018. In summary, the Commission has proposed to create a new classification system for investment firms, ranging from Class 1 (systemically important investment banks) to Class 3 (the smallest investment firms). For Class 2 and Class 3 firms, the draft legislation would create new, tailored prudential and organisational requirements, whereas Class 1 firms would remain subject to the Capital Requirements Directive for banks (as they are at present).


We received a further update from the Economic Secretary on the state of play in the negotiations in December 2018. This indicated that the Member States had arrived at a common position with respect to the regulation of smaller (Class 2 and Class 3) investment firms, but that the treatment of the systemically-important ones (Class 1) was still being negotiated. Similarly, discussions were on-going about the ‘equivalence’ provisions under MiFIR, and whether these should be amended in light of the UK’s withdrawal from the EU, with the remaining Member States focussing on the powers of the European Securities & Markets Authority (ESMA) to supervise and regulate the activities of non-EU firms on the EU market. The Minister also informed us that the European Parliament had taken a very restrictive approach to ‘third country’ access, excluding certain investment activities from the scope of any equivalence decision altogether.


The investment firm review proposals are also relevant under the recent Financial Services (Implementation of Legislation) Bill. This would give the Government the power to implement a limited number of pending EU proposals on financial services—including the prudential regime for the investment industry—into UK law by Statutory Instrument in the event of a ‘no deal’ (that is, even if it is no longer under an EU legal obligation to apply this legislation). This power would exist for two years after ‘exit day’ (29 March 2019).

Other publications from the RegZone Brexit news feed

HoC Library Briefing Paper: The EU27: Internal Politics and Views on Brexit

This paper examines the views of each of the EU27 on Brexit and any contingency planning for a possible no-deal Brexit. It also provides background on their internal politics and trade and economic statistics. The full paper can be accessed here.

HoC Library Briefing Paper: European Union (Withdrawal) (No. 2) Bill 2017-19

This bill would require the Government to request an extension to the Article 50 Brexit process in certain circumstances. This paper explains how this Bill proposes to give Parliament greater control over the Government's negotiations with the European Union. The full paper can be accessed here.

HMT: The Financial Conglomerates and Other Financial Groups (Amendment etc.) (EU Exit) Regulations 2019

Draft Regulations laid before Parliament together with explanatory notes. The SI can be accessed here and the explanatory notes here.

The Investment Exchanges, Clearing Houses and Central Securities Depositories (Amendment) (EU Exit) Regulations 2019

Draft Regulations laid before Parliament together with explanatory memorandum. The SI can be accessed here and the explanatory notes here.

HoC: Response to the vote on the withdrawal agreement and political declaration: Options for Parliament

HoC: Response to the vote on the withdrawal agreement and political declaration: Options for Parliament The HoC Exiting the EU Committee has published a report on the options open to parliament following the vote on the Withdrawal Agreement on 15/01/2019. The full report can be accessed here.

HoC: EU assurances to the UK on Brexit

This HoC library briefing sets out what the EU has offered by way of "clarifications" and "assurances" on the backstop. The full briefing paper can be accessed here.

EC: Speeches by Frans Timmermans and Michel Barnier

Text of speeches made by Frans Timmermans and Michel Barnier on 16 January 2018 follow which set out the EC's reaction to the 15 January 2018 debate and vote. The speeches can be accessed here.

HoL EU Committee: "No deal" preparations

The Committee has published a letter sent to the Department for Exiting the European Union highlighting concerns over the Government's no deal planning and casting doubt on the possibility of a "managed no deal". Amongst other matters, the Committee requests a summary of actions the Department is taking in respect of key priority areas as identified by the EC (which includes financial services). The full letter can be accessed here.

PMO: Statement to HoC

Text of Theresa May's statement to HoC of 14 January 2019 can be accessed here.

The Credit Institutions and Insurance Undertakings Reorganisation and Winding Up (Amendment) (EU Exit) Regulations 2019/38

This SI is made in order to address deficiencies in retained EU law in relation to the reorganisation and winding up of credit institutions and insurance undertakings arising out of Brexit. The draft SI can be accessed here.

Draft Financial Services Contracts (Transitional and Saving Provision) (EU Exit) Regulations 2019

Draft Regulations laid before Parliament under paragraphs 1(1) and (2) and 12(1) of Schedule 7 to the European Union (Withdrawal) Act 2018, for approval by resolution of each House of Parliament. The draft SI can be accessed here and the explanatory notes here

PMO/Department for Exiting the EU: Brexit

Ahead of the 15 January 2019 vote, Theresa May's speech on Brexit of 14 January 2019 follows. She states: "while no deal remains a serious risk, having observed events at Westminster over the last seven days, it is now my judgment that the more likely outcome is a paralysis in Parliament that risks there‪‪ being no Brexit." She also refers to correspondence from the Attorney General and her letter to Donald Tusk and Jean-Claude Juncker concerning the Northern Ireland backstop. The Department for Exiting the EU has published these items, along with the response from the EU. The PM’s speech can be accessed here, the exchange of letters here and the letter by the Attorney General 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 hereand 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.