Brexit and FCA regulation: the impact on EU and FCA non-legislative materials

• United Kingdom

• Brexit
• Employment law
• Financial services

05-01-2021

The New Year 2021 saw the conclusion of the Brexit process with the agreement of a future trade deal, together with the necessary legislative and regulatory changes to bring this into effect.

In anticipation, in December the FCA published the final instruments that apply post-Brexit which have the effect of transposing EU law into UK domestic law. The FCA also revised the FCA Handbook to reflect these changes, including updates to the Senior Manager Arrangements Systems and Controls (SYSC) Remuneration part of the Handbook to reflect Capital Requirements Directive V.

We have understood for some time that EU laws would be transposed into UK legislation. That has transpired and so, to that extent, there was no effective change at the end of December. There had been uncertainty about the status of EU non-legislative materials and guidance which were often helpful in clarifying the regulators’ expectations and aiding interpretation of EU law. Now that the UK has left the EU, may firms still refer to these materials? Do they carry the same weight?

Helpfully, the FCA has also updated its guides on the approach to EU non-legislative materials and non-Handbook guidance (where this relates to EU law or EU derived law), together with completing FCA forms in the future. Taking each of these in turn: 

1. EU non-legislative materials

EU non-legislative material published prior to 31 December 2020

The European Supervisory Authorities (being the European Banking Authority, European Insurance and Occupational Pensions Authority and European Securities and Markets Authority) frequently produce non- binding material including guidelines and recommendations on the application of EU law. This material has not been incorporated into UK law.

The FCA has confirmed that this kind of non-legislative material will ‘remain relevant’ to the FCA and firms in monitoring their compliance with regulatory requirements, including the FCA Handbook. The FCA will ‘continue to have regard’ to EU non-legislative material ‘where and if they are relevant’, taking account of Brexit and ongoing domestic legislation. The FCA expects firms to continue to apply ESA Guidelines to the extent they remain relevant, interpreting them in light of the UK’s withdrawal from the EU and associated legislative changes.

One exception to the above is the ‘bonus cap’ contained in the European Banking Authority’s (EBA) sound remuneration policies. The FCA has notified the EBA that it will comply with all aspects of these guidelines except for the bonus cap (a requirement that the limit on awarding variable remuneration to 100% of fixed remuneration, or 200% with shareholder approval, must be applied by all firms subject to the Capital Requirements Directive. Of course, the FCA and PRA had previously notified the EBA in 2016 that they would not implement the bonus cap and in essence the UK’s position has not changed.

2. EU non-legislative material published after 31 December 2020

With regard to EU non-legislative material published after 31 December 2021, the FCA notes EU law and EU-derived law in this area has largely been retained and such non-legislative material will remain relevant. However, the FCA may issue guidance if it determines that financial institutions are no longer expected to ‘make every effort to comply’ with a particular Guideline. This could be, for example, due to changes made to the relevant underlying legislation.

Firms subject to the Capital Requirements Directive should note that the EBA is consulting on revised guidelines on sound remuneration policies in light of the CRD V Directive. Those guidelines apply to variable remuneration of staff whose activities have a material impact on the firm’s risk profile. These would replace the existing 2015 guidelines and the FCA has clarified firms should continue to refer to the guidelines for the EBA’s interpretation of remuneration provisions (as guidelines, they are not, however, binding).

The guidelines set out in detail the requirements for remuneration policies, the respective governance arrangements and processes which should be applied when remuneration policies are implemented. The guidelines on severance pay, retention bonuses and discretionary pension benefits have been clarified to avoid that such payments are used to circumvent the requirement of the bonus‐cap.

The deadline for responses is 29 January 2021 and final guidelines are expected in the first half of 2021. See note showing the changes made to the 2015 guidelines.

3. Non-Handbook guidance

The FCA has clarified that non-Handbook guidance (e.g. technical notes, case studies and Dear CEO letters) issued before 31 December 2020 will generally not be amended post-Brexit and that firms should continue to take relevant guidance into account in relation to EU or EU-derived provisions which become (or remain) UK law.

You can find further details of the FCA’s intended approach to EU materials on their website:

• Approach to non-legislative materials
• Approach to non-handbook guidance
• Guide to completing FCA forms after Brexit