European Commission legislative proposals with emergency powers in case of “no deal” Brexit
On 18 April the Financial Times reported that the EC was preparing 30 to 40 legislative proposals to cover a "no deal scenario” in case of a breakdown in Brexit negotiations. These would be available either at Brexit or at the end of the planned transition period on 31/12/20. These would cover a wide range of areas, including financial services, and would be adopted before Brexit whilst the UK is still an EU member.
In FS this may well include emergency powers for the European Supervisory Authorities (EIOPA, ESMA and EBA). The measures could cover UK firms conducting business in the EU under the single market regime (including for the servicing of derivative contracts as referred to above).
Department for Exiting the EU: Information about the Withdrawal Bill – draft SIs
The Department for Exiting the EU has published a number of draft SIs, including the Financial Regulators’ Powers (Technical Standards) (Amendment etc.) (EU Exit) Regulations 2018, with covering note. Click here to access SIs.
In the UK, HMT has provided confirmation of its approach to “who does what” in the context of financial services regulation post- (and in preparation for) Brexit. The domestic regulators will be given certain roles and responsibilities, whilst some areas will be reserved to the government and Parliament.
In its covering note, HMT says it is publishing the draft SI in the context of the current parliamentary debate of the European Union (Withdrawal) bill (the EU Withdrawal Bill) in order to illustrate the use of powers under clause 7. For the FS sector the politics of the, so called, Henry VIII powers may be of less interest than the confirmation of “who will do what”. The draft SI (which is not in final form) is complex (and the purpose of this update is to capture the thrust, rather than the detail, of what is proposed) and deals with two areas –
- The respective roles/responsibilities for “on-shored” financial services regulation post-Brexit (i.e. “who does what” in the context of setting financial regulation - both legislation and rules – that is currently handled at the EU level)
- The correcting of “deficiencies” in FS regulation under clause 7 of the EU Withdrawal Bill (i.e. the amendment of retained EU law as ported across into domestic UK law by the EU Withdrawal Bill to correct for deficiencies (e.g. because the ported regulation contains single market based measures which are no longer applicable).
This may perhaps be seen as demonstrating the complex, and somewhat Kafkaesque, structure of UK FS regulation post-Brexit.
The overall policy is broadly to follow the allocation of current domestic responsibilities under the Financial Services and Markets Act (FSMA) regime. The result is that the domestic regulators – the Bank of England, PRA, FCA and the Payment Systems Regulator – will assume the new responsibilities and powers in so far as these relate to their rulebooks. In addition, however, they will also be given responsibility for binding technical standards ("BTS").
There are two kinds of BTS - Regulatory Technical Standards (RTS) and Implementing Technical Standards (ITS). (You can read more about the EU legislative process in FS and about BTS on RegZone here.) BTS are sometimes referred to as “level 2.5” of EU regulation. Delegation is provided for in directives and regulations at level 1 (confusingly known as secondary legislation) – the first level of delegation (known as tertiary legislation or level 2 - are delegated and implementing acts) involve more substantial issues which are delegated to the European Commission (these will become the responsibility of the UK Parliament and HMT). At level 2.5, RTS and ITS have slightly different roles but both are “technical [and] shall not imply strategic decisions or policy choices”. The ESAs (EIOPA, EBA and ESMA) play a leading role in the development of BTS (although technically they are adopted by the EC as non-legislative acts). Finally there is level 3 guidelines issued by the ESAs (an area which one assumes will become the responsibility of the domestic UK regulators – but this is not covered in the HMT publications). The domestic responsibilities of UK regulators for BTS appear to cover -
- Dealing with BTS ported across under the EU Withdrawal Bill and getting these into shape for Brexit.
- On-going responsibility for the BTS – as if these were part of the regulator’s own rule book – this would include post-Brexit changes to pre-Brexit BTS as ported across under the EU Withdrawal Bill e.g. to reflect domestic policy changes after Brexit when UK policy might diverge from EU regulation
- The responsibility for issuing new BTS. UK domestic regulation post-Brexit will incorporate EU derived regulation (both directly applicable EU legislation “converted” under the EU Withdrawal Bill and UK implementation of EU directives “preserved” under the EU Withdrawal Bill). Ported level 1 EU directives and regulations will still contain powers for non-legislative acts at level 2 and BTS at level 2.5. New BTS (and level 2 acts) may be required after Brexit; this might be driven by domestic policy post-Brexit or might reflect a common policy with the EU and involve a UK BTS modelled on a new EU BTS post-Brexit. It is also possible that the UK might transpose, on a voluntary basis, new EU legislation post-Brexit. This may require or provide for BTS; the relevant UK regulator would then be responsible for deciding what UK BTS should be made, whether acting in parallel with the ESAs or independently. It is also possible that the UK might transpose, on a voluntary basis, new EU legislation post-Brexit/transition. This may require or provide for BTS; this would not constitute retained EU law under the EU Withdrawal Bill but the relevant UK regulator would presumably be made responsible for BTS under the UK parallel legislation. .
Responsibility for EU derived level 1 legislation and level 2 non-legislative acts (but not BTS and certain technical aspects of level 2 acts) will rest with Parliament in accordance with the FSMA model. HMT will therefore lead policy in these areas. It will, for example, exercise the (Henry VIII) powers under the EU Withdrawal Bill to adapt level 1 and 2 retained EU law for Brexit deficiencies; this will mostly involve the affirmative procedure for Parliamentary scrutiny.
The EU Withdrawal Bill’s clause 7 powers will be delegated to the relevant domestic regulator for them to amend, for Brexit deficiencies, both
These amendments will take the form of “EU Exit Instruments” and will be submitted to HMT which will handle the Parliamentary scrutiny process before they take effect.
There had been speculation that the regulators might use their existing rule-making powers under FSMA but HMT has decided that all adaptations for Brexit deficiencies should be made under the EU Withdrawal Bill and the regulators will therefore be prevented from using their general powers for this purpose.
DBEIS: Brexit and state aid
The HoL EU Internal Market SubCommittee has published the text of a letter from DBEIS responding to its report and which is intended to “provide as much certainty as possible on how state aid will be managed going forward”. Click here to access letter.
The letter describes the government’s policy on state aid regulation after the EU regulatory regime ceases to apply in the UK. State aid is subject to EU/UK negotiations but a new UK regime would need a new regulatory body to take on the role currently performed by the EC; it is envisaged that this role would be performed by the Competition and Markets Authority.
Other publications from the RegZone Brexit news feed
HoC: Brexit: new guidelines on the framework for future EU-UK relations
This HoC library briefing sets out details of the EC March 2018 guidelines. Click here to access the briefing.
HoC Public Accounts Committee: Exiting the EU: the financial settlement inquiry
The Committee has launched an inquiry into the financial settlement with the EU following Brexit. Click here for more details.
HoL: European Union (Withdrawal) Bill
Transcripts of the report stage of the Bill have been published and are available here. Amendments discussed covered clauses 1- 4 of the Bill. A second day of report stage is scheduled for 23 April 2018.
HMT: EU withdrawal financial settlement
Further to the UK/EC joint report on the first stage of negotiations in December 2017, TSC has now published the text of a letter sent by Philip Hammond dated 24 January 2018 which sets out information on the components of the settlement and the principles for their valuation. Click here to access the letter.
NAO: Exiting the EU: the financial settlement
NAO’s report sets out details of the settlement within the context of the wider negotiations on the UK’s withdrawal from the EU, and how much the government expects the settlement to cost; assesses HMT’s estimate of the settlement, aspects of the financial settlement that are still to be finalised and those areas where the value of the settlement could be affected by future EU decisions. Click here to access the report.