Brexit update for financial services firms - week ending 17 August 2018


ECB: Supervisory Newsletter

ECB has published the latest edition of its newsletter. Topics include: Brexit planning; ECB's approach to supervising governance; recovery planning; building a common supervisory approach for smaller banks and an interview with Ed Sibley (Deputy Governor of the Central Bank of Ireland and ECB Supervisory Board member on the importance of diversity to the governance, culture and risk profile of banks. All articles may be downloaded individually via the following link.

“At the core of this is the ECB’s communication to both incoming and outgoing banks to prepare for all contingencies – including a no-deal scenario – and to counter the idea floated by several banks of setting up “empty shell” institutions.”

“Even if an agreement is reached, the UK’s relationship with the EU will no longer be that of a Member State. This is especially relevant given the UK government’s current stance, i.e. that it does not expect to retain the current levels of access to the EU’s market for services (see the UK’s White Paper from July 2018 “The future relationship between the United Kingdom and the European Union”). For that reason, all banks affected by Brexit should act before March 2019 to mitigate the risk associated with losing access to the EU single market.”

“Banks should not expect public sector solutions to help them with the challenges they are facing. As communicated before, banks may use a limited and clearly defined build-up period to meet certain supervisory expectations if this has been previously agreed with the ECB and national supervisors. However, this does not affect the requirement that core capabilities need to be located in the euro area from day one (30 March 2019) and that the build-up to the target operating model needs to be finalised in good time, consistent with supervisory expectations.”

“The ECB will continue to closely follow banks’ preparations and will counter any effort by them to establish empty shells in the euro area. Supervisors have made effective use of the time since the UK decided to leave the EU and continue in their preparations for the post-Brexit era. Now it is up to the banks to speed up their work and complete their preparations during the final count-down to Brexit.”

Deposit Guarantee Scheme and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018 (Draft)

This SI will make amendments to retained EU law related to deposit protection, FOS and certain inquiries and investigations to ensure that they continue to operate effectively in a UK context once the UK leaves the EU, in any scenario. An explanatory policy note has also been published. HMT intends to lay this SI before Parliament in the autumn. The SI and the accompanying explanatory note can be accessed here.

The explanatory note says - “Deposit Guarantee Schemes (DGS) are an important mechanism for ensuring financial stability and confidence in credit institutions (e.g. banks, building societies and credit unions). DGS support orderly resolution and timely pay out of DGS-covered deposits to depositors. This is especially important during periods of financial stress where depositors can be sure that the money in their bank accounts is covered up to a certain limit, even if their bank, building society or credit union fails.”

“The Financial Services Compensation Scheme (FSCS) is the UK’s DGS and is responsible for paying compensation to depositors when an authorised UK credit institution has failed. The FSCS also provides compensation to customers of certain other types of firms e.g. insurers and investment firms. EU exit related changes to FSCS membership and rules are being made in the EEA Passport Rights (Amendment etc., and Transitional Provisions) (EU Exit) Regulations 2018 and UK regulators’ rulebooks.”

“The UK transposed the Deposit Guarantee Scheme Directive (DGSD) through the Deposit Guarantee Schemes Regulations 2015, amendments to the Financial Services and Markets Act 2000 (FSMA) and via the Prudential Regulation Authority (PRA) rulebook.”

“The Financial Ombudsman (FOS) is the UK’s alternative dispute resolution provider for the financial services industry. The policy intent behind the establishment of the FOS was to provide consumers with a free, independent service that enabled the fair, prompt and informal resolution of disputes with financial firms. It is designed as an alternative to resolution of cases through the courts, which can be expensive for consumers and delay redress. The FOS also satisfies the legal requirement for an alternative dispute resolution entity under European Law (ADR Directive).”

“The FOS is provisioned for in FSMA. More detailed rules on how the FOS operates, including the details of its jurisdiction, are determined by the FCA and the FOS and set out in the FCA Handbook.”

“Schedule 17 to FSMA contains references to EU legislation (the ADR Directive 2013/11/EU). Part 2 of this SI amends these references to ensure they continue to function post-exit.”

“Part 3 of this SI transfers coverage level setting power from EU institutions to UK institutions. The PRA will have the power to review, adjust and set the deposit coverage level with approval from HMT.”

“This part of the SI also removes the arrangement whereby the FSCS administers compensation payments to depositors at UK branches of EEA credit institution on behalf of an EEA DGS (in essence, the FSCS will no longer serve as an intermediary). However, the SI also includes a transitional provision allowing the FSCS to continue after Exit to accept instructions and funds from EEA DGS in the event that an EEA firm operating in the UK fails immediately before the UK’s exit from the EU.”

“This SI removes the requirement on the PRA to notify the EBA each year of the amount of deposits in the UK which are covered by the FSCS and the funding available to the FSCS. The PRA will also no longer have to notify the EBA of any agreements between the FSCS and other EEA DGS.”

“This SI also amends EU references and removes arrangements which will no longer be appropriate after withdrawal. For example, references to incoming EU firms in domestic legislation.”

“The PRA and FCA will be updating their rulebook and handbook respectively to reflect the changes introduced through this SI, and to address any deficiencies resulting from the UK leaving the EU. The PRA and FCA have confirmed their intention to consult on these changes in the autumn.”

“This SI does not include provisions that may be necessary to ensure Gibraltarian financial services firms’ continued access to UK markets in line with the UK government’s statement in March 2018, and other provisions dealing with Gibraltar more generally. Where necessary, provisions covering Gibraltar will be included in future SIs.”

Other publications from the RegZone Brexit news feed

HMT: Financial stability report – record of meeting

HMT has now published the record of the meeting between Philip Hammond and Mark Carney on 4 July 2018. Topics include: FPC’s latest assessment of financial stability risks; Brexit; cyber risk and LIBOR. The report can be accessed here.

FCA: Regulation round-up

The latest edition of FCA's regulation round-up has been published. This includes details of recent publications and forthcoming events as well as noting forthcoming changes to the Connect application system. The report can be accessed here.

DBEIS/Department for Exiting the EU: Business Secretary Meetings

This press release notes meetings held by Greg Clark with ministerial counterparts and businesses in Austria and Finland to discuss the Chequers white paper and future economic relationships post Brexit. The press release 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.