There was not a huge amount of financial services (FS) material published this week. The regulatory regime for a no-deal scenario (the ND regime) continues to be the main area of focus.
Steven Maijoor gave a speech which provides a useful overview of ESMA’s preparations for the ND regime (see Document 2 below). All of the areas of change have been covered in our previous updates. The press reported concerns about lack of ESMA recognition of UK trading venues under the ND regime and the impact on EU fund managers who would be unable to trade dual listed shares on UK markets. (Related analysis can be found in previous updates - EU no deal preparations here, the similar issues for Switzerland here and the future development of MiFID II here.)
The House of Commons European Scrutiny Committee Report looked again at the changes to the ESFS and the impact on the UK after exit and under the ND regime (see chapter 3 of the report at Document 4 below) – see our previous analysis here.
On-shoring the acquis and modifying inoperative provisions in the domestic version.
Statutory instruments (SIs) under the UK’s on-shoring/NtA process for FS continued through the parliamentary process – see various SIs listed below and see our RegZone no deal database for a complete database of SIs and their current status. The creation of the UK’s ND regime in FS is proving to be a complicated process. It involves a new UK version of EU regulation, so that each EU regulation has a matching UK on-shored version. Retained EU law (and domestic regulation) is then modified by a vast number of amendments in SIs under section 8 of the European Union (Withdrawal) Act 2018 (EUWA). These, together with a mass of modifications by the UK regulators at rule-book level and to on-shored technical standards, turn ‘inoperative’ pan-EU provisions into domestic UK specific regulation.
This process of modification has been far from straightforward. The changes have been spread across over 60 SIs which have been introduced one after the other. Drafts have been amended, withdrawn and replaced. SIs have contained drafting errors and have been overtaken by policy evolution as they have completed the parliamentary process. Later SIs then revoke earlier SIs that have complete their parliamentary process, amend earlier SIs in order to correct mistakes and adjust for policy changes. Many SIs are dependent on powers in other SIs; some of the changes in draft SIs are dependent on powers to be granted in further SIs that have yet to be published, even in draft. Keeping track of, and assessing, the emerging ND regime is therefore a difficult task. It is not surprising, therefore, that the Treasury Select Committee (TSC) has had to write to the Treasury (HMT) for clarification – see Document 1 below. The letter followed evidence on the Draft Financial Services (Miscellaneous) (Amendment) (EU Exit) Regulations 2019 - this draft was replaced by a new draft last week – see the news item and links in ‘Other publications’ below. It concerned the Equivalence Determinations for Financial Services and Miscellaneous Provisions (Amendment etc.) (EU Exit) Regulations 2019(the Equivalence SI) - see link to the SI and explanatory memorandum at Document 1 below.
Putting DRC in place for the UK’s ND regime.
It may be helpful to unpick some of the background here as it concerns the mechanisms by which the UK can introduce DRC/mutual recognition under the ND regime. Many of the onshoring modifications relate to the permanent re-writing of EU regulation to make it operate in the domestic/UK-only context. This includes modifications to the on-shored various provisions which enable the EU to put in place DRC relating to third countries (TCs).
As modified, these enabling provisions/powers provide HMT and the UK regulators with the power to introduce a wide variety of TC DRC measures. This suite of powers provides the UK with a mirror-image of the EU’s regime for TC DRC. Under the ND regime, these powers can be used to provide DRC related to non-EU/EEA countries (and potentially to mirror current EU DRC related to those countries – see second bullet below) and also to provide DRC relating to EU/EEA/member states.
Many of these DRC powers relate to, so-called, equivalence frameworks/provisions. These enable HMT to determine that a TC’s regulation is equivalent to the UK (and sometimes that it has equivalent provisions to allow reciprocal treatment). Such an equivalent decision leads, directly or indirectly, to DRC relating to that TC. In some cases, further pre-conditions need to be satisfied for DRC, for example the need for an MoU to facilitate cooperation between the regulators of the UK and the TC. In some cases, the DRC is dependent on individual institutions from the equivalent TC being recognised by, or registered with, the UK regulator.
The UK authorities will be able to use these DRC powers in relation to TCs outside the EU/EEA but they will also be able to adopt DRC (and make related equivalence decisions) in relation to the EU/EEA/member states. Under the ND regime, there will be various ways in which the UK authorities can establish DRC –
- After exit when the ND regime takes effect, the on-shored procedures for granting DRC (and making equivalence decisions) can be followed, but the DRC would not be in place until sometime after exit;
- Existing EU equivalence decisions (in the form of European Commission implementing decisions) are tertiary EU law which is on-shored under the EUWA. These decisions only relate to non-EU/EEA countries. Some equivalence decisions are revoked by the relevant NtA SI (e.g. because on exit, DRC will be provided by other means (see below); for example, Regulation 9 of the Central Counterparties (amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018 (the CCP NtA SI) revokes (for the purposes of the UK ND regime) all European Commission implementing acts under Article 25(6) of EMIR. Other on-shored decisions are modified for the UK context by the Equivalence SI; see regulation 7 and schedule 2 which includes modifications to the on-shored version of various European Commission implementing and delegated acts under EMIR; MiFIR; CRR; Solvency II and the Prospectus Directive. These modify equivalence decisions relating to various (non-EU/EEA) countries (in their on-shored from) for the UK regime. Under EMIR, for example, the modified equivalence decisions relating to regulated markets apply to markets in the US, Singapore, Japan, Australia and Canada, whereas the modified equivalence decision relating to the treatment of exposures under CRR applies to many countries.
- Existing EU DRC arrangements for TC firms may be on-shored; for example, Regulation 8 of the MiFIR NtA SI provides that TC firms which are included on the register with ESMA immediately before exit day under Article 46.2 of MiFIR are to be treated after exit day as being registered with the FCA. Again this only relates to non-EU/EEA countries;
- Under the Equivalence SI, HMT is given time-limited powers under Regulation 2 to make directions that EEA states are equivalent for the EU-derived regimes listed in Schedule 1, for up to 12 months after exit. This is an expedited/simplified process which will enable the UK to have DRC in place for EEA states on exit (as, obviously, there are no equivalence decisions for the EU/EEA to be on-shored). Schedule 1 lists various equivalence-based DRC provisions in the on-shored version of the following (but this does not cover all equivalence measures in this legislation) – Benchmark Regulation; CRR; Credit Rating Agency Regulation; EMIR; MiFIR; Prospectus Directive, Transparency Directive; Securities Financing Transactions Regulation; Short Selling Regulation and Solvency II Regulation.
- Specific ND regime provisions (which are not EU derived) provide for transitional DRC for EU/EEA institutions – for example under the temporary permission and recognition regimes (previous updates have looked in detail at these regimes and they are listed in the RegZone No Deal database); for example, the CCP NtA SI contains transitional provisions at Part 6 which establish the temporary recognition regime for CCPs. This regime is open to CCPs from EU/EEA states and non-EU/EEA states. (The temporary permission regime, on the other hand, is only available to EU/EEA firms operating under a single market passport at exit.)
On exit, EU/EEA related DRC will be provided partly under temporary permission/recognition regimes and partly by means of HMT exercised powers under the Equivalence SI. In the longer term, this will be replaced by HMT regulations under the permanent procedures (under the first bullet above) which involve greater parliamentary scrutiny (under the negative resolution procedure).
1. TSC: Draft Financial Services (Miscellaneous) AMendment) (EU Exit) Regulations 2019
TSC has published correspondence to and from HMT with regard to aspects of the Regulations, specifically the temporary permissions regime. The Select Committee Letter can be accessed here and the HMT letter here.
The SI and the explanatory note can be accessed through the links.
“In addition, I am aware that the Government has proposed a further IS: Equivalence Determinations for Financial Services and Miscellaneous Provisions (Amendment etc.) (EU Exit) Regulations 2019, which will be debated in Delegated Legislation Committee on Tuesday 12 February.
Before then, I’d be grateful if you could set out why the Treasury requires the power to designate third countries as equivalent, given the regulators already have a temporary permissions regime to enable them to carry out their objectives in the event of no deal. And why, if this power is needed, is it only being granted for 12 months, rather than for the same length of time as the temporary permissions regime.”
“The ability to grant equivalence will form a key part of the UK’s financial services regime after exit day. Parliament has already approved the transfer of individual equivalence functions from the Commission to the Treasury from exit day in several SIs laid under the European Union (Withdrawal) Act 2018, granting the Treasury powers to determine whether third countries are equivalent for specific areas of the UK financial services regimes by regulations.
The Equivalence SI completes the UK’s equivalence framework and fills the gap that arises on exit day, when the EU and the UK will become third countries to each other. Firstly, it fixers deficiencies in exiting Commission equivalence decisions which will become retained EU law (such as replacing references to “union” with “UK”), avoiding disruption for firms which rely on these existing decisions. Secondly, it revokes the ESA regulations, which grant advisory powers to the ESAs and are therefore no longer relevant in the UK after exit, and creates functions for the Bank of England, the Prudential Regulations Authority and the Financial Conduct Authority (the regulators) to provide technical advice to the Treasury.
Thirdly, the Equivalence SI contains time-limited power for Treasury Minsters to make directions that EEA states are equivalent for the regimes listed in the SI, for up to 12 months after exit day. This power is required to allow the Treasury to make equivalence decisions for the EEA quickly and efficiently, in time for exit day, should Minsters determine that this is appropriate. The Treasury will apply the same substantive requirements as are currently applied to other third countries.
After this power expires, and also for any third country outside the EEA from exit day, the Treasury must make equivalence decisions by regulations subject to the negative resolution procedure as set out in the relevant legislation covering the regimes. The Treasury expects that the process for making third country equivalence decisions by regulations would be operable soon after exit day (the powers to make decisions by of regulation and the obligations on the regulators do not come into force until exit day), and therefore the power in the Equivalence SI is appropriately time-limited.”
2. ESMA: Speech by Steven Maijoor: Brexit – the regulatory challenge
Text of this speech, given on 13 February 2019, follows, in which Steven Maijoor discusses ESMA's preparations for a no-deal Brexit (including with regard to secondary markets, clearing and settlement and the regulatory cooperation agreements in place) and considers third country regimes and ESMA's post-Brexit work. The speech can be accessed here.
“Like the tick size regime, there are other MiFID II provisions where third-country trading venues play an important role. One of those provisions which has raised concerns among market participants in case of a no-deal Brexit, is the trading obligation for shares. EU investment firms are only allowed to trade shares subject to this trading obligation on venues and systematic internalisers in the EU, and on third-country trading venues declared equivalent by the European Commission. To date no such equivalence decision exists for the UK.
ESMA is looking at this issue with a view to avoiding disruption in financial markets as far as possible while respecting the intention of the trading obligation as foreseen under MIFID II. We intend to provide more clarity on this matter sufficiently ahead of Brexit date.”
3. TSC: THe work of the PRA
A transcript of the hearing held on 23 January 2019 follows. This was attended by Sam Woods and other senior PRA executives. Topics include: Brexit; enforcement and whistle-blowers; senior manager issues; financial crime; competition; Solvency II and credit unions. The full transcript can be accessed here.
“Great, thank you for that. Yes, there is more to follow and the Committee will be following up on diversity generally. I wanted to move very briefly on to Brexit, because we are going to return to it next week, particularly on that SI about the no-deal powers. I just wondered if you could give us a brief update on the PRA’s work, particularly around the number of EU or EEA firms that have been applying for authorisation, interest in a temporary permissions regime and any other discussions you are having with EU regulators.”
“Broadly, we are on track. I will not go through the whole list of things we have been doing, which are broadly tracking as expected. One of the most important is the thing we are going to talk about next week, the transitional power SI. The temporary permissions regime was the single most important thing Parliament has done for us, in terms of managing the risk of a cliff edge. That is going pretty well. We have expected for about the last 12 months now that the amount of firms we would have applying for that, split across banking and insurance, would be about 170. That number has not really moved. We are still expecting that number. We have had about 80 in so far. That is the number of applications for branch status. On the temporary permissions regime itself, for which people only need to notify, we have had 100 since it came in. But of those 70, if you have applied for branch status, that kind of automatically gets you notified. The total number under the temporary permissions regime, as distinct from the 170, which are those we expect to want to stay here permanently as a branch, we will only find out in due course. It depends how many come out of the woodwork that we were not previously aware of because they are not currently within our bailiwick. That number is small at the moment but may get larger”
4. Hoc: European Scrutiny Committee: 54th report of session 2017-2019
Section 3 of the report considers aspects of ESFS, including its application in the UK post-Brexit. This matter is still under scrutiny by the Committee. The report can be accessed here.
Other publications from the RegZone Brexit news feed
BoE: Brexit and uncertainty
This BoE staff working paper sets out insights from the Decision Maker Panel (which is described as "a new and novel firm-level data set that was instigated specifically to help better understand the uncertainties associated with Brexit"). The publication can be accessed here.
HoC: EU trade agreements
This HoC library briefing sets out a list of EU trade agreements in force and provides a note on the Government's progress in rolling them over. The briefing paper can be accessed here.
BoE: Supervision of financial market infrastructures annual report
BoE's 2019 annual report sets out how BoE has exercised its responsibilities in respect of supervising financial market infrastructure over the past year, including with regard to Brexit and payment services. The publication can be accessed here.
The Credit Rating Agencies (Amendment etc.) (EU Exit) Regulations 2019/266
This SI has now been made. It can be accessed here.
The Financial Conglomerates and Other Financial Groups (Amendment etc.) (EU Exit) Regulations 2019/264
This SI has now been made. It can be accessed here.
The Money Laundering and Transfer of Funds (Information) (Amendment) (EU Exit) Regulations 2019/253
This SI has now been made. It can be accessed here.
CMA: Annual Plan 2019/2020
The Plan sets out CMA’s programme for 2019 to 2020, including its responsibilities in respect of state aid post-Brexit. The publication can be accessed here.
PSR: Board minutes
PSR has now published the minutes of its 22 November 2018 Board meeting. Topics include: the impact of Brexit on the payment sector. The board minutes can be accessed here.
FCA: Operation of the MoU with BoE for market infrastructure - 2018 performance statement
In this short note, FCA states that the authorities will update the MoU to ensure it continues to appropriately reflect their respective roles and responsibilities once the UK has left the EU. The note can be accessed here.
ESMA: Speech by Verena Ross
Text of a speech given by Verena Ross on 12 February 2019 at the Cross-Border Distribution Conference follows. Topics include investment funds and systemic risks and Brexit. The full speech can be accessed here.
ECB: Speech by Sabine Lautenschläger: Risks to banks – from inside and out
Text of this speech, given on 13 February 2019 follows, in which Sabine Lautenschläger considers external and internal risks to banks, including geopolitical risks (such as Brexit), technology, governance, culture and ethics. The full speech can be accessed here.
ECB: Q&A with Sabine Lautenschläger
Topics include: Brexit, Basel III and governance issues. The Q&A can be accessed here.
HoC: Extending Article 50: could Brexit be delayed?
This HoC library briefing considers scenarios in which an Article 50 extension could be made and whether it could lead to the UK taking part in the European Parliament elections. The briefing paper can be accessed here.
HoL: Ongoing Brexit discussions with the EU
This briefing pack was prepared for a debate on two motions on Brexit, expected to be taken together on 13 February 2019. It can be accessed here.
EC: The EU-UK Withdrawal Agreement explained
A slide presentation by the EC's Article 50 taskforce. It can be viewed here.
HoC: Debate on a Motion relating to the UK's withdrawal from the EU
HoC has produced this debate pack for the debate scheduled for 14 February 2019. It can be accessed here.
PMO: Statement by Theresa May
Text of Theresa May's statement to HoC on 12 February 2019 can be accessed here.
BoE: Speech by Mark Carney: The global outlook
Text of this speech given by Mark Carney on 12 February 2019 follows. Topics include Brexit. The full speech can be accessed here.
Draft Financial Services (Miscellaneous) (Amendment) (EU Exit) Regulations 2019
This SI replaces an earlier draft of the Regulations. It can be accessed here.
The Consumer Protection (Enforcement) (Amendment etc.) (EU Exit) Regulations 2019/203
This SI revokes the CPC Regulation and amends Part 8 of the Enterprise Act 2002, Schedule 2 of the Data Protection Act 2018 and Schedule 5 of the Consumer Rights Act 2015. The SI can be accessed here.
HoL Exiting the EU Committee: The progress of the UK’s negotiations on EU withdrawal: role of Parliament
As part of its ongoing inquiry into the progress of negotiations, the Committee has announced an additional call for evidence, with responses required by 1 March 2019. The briefing paper can be accessed here.
 Please see: Brussels rejects pleas for dual-listed London trading, Financial Times, 15 February 2019
 Nationalising the Acquis
 See corrections in Part 3 of the Draft Financial Services (Miscellaneous) (Amendment) (EU Exit) Regulations 2019 – this includes amendments to the Equivalence SI.
 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”.
 Regulation 648/2012
 Regulation 600/2014
 Regulation 575/2013
 Directive 2009/138/EC
 Directive 2003/71/EC
 Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018 ( SI ‖ Exp. Note )
 Regulation 2016/1011
 Regulation 1060/2009
 Directive 2004/109/EC
 Regulation 2015/2365
 Regulation 236/2012