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Getting on with it: the FCA and PRA plans for Brexit

Getting on with it: the FCA and PRA plans for Brexit

  • United Kingdom
  • Brexit
  • Financial services and markets regulation
  • Financial institutions

17-04-2018

Introduction

On 9 April the Financial Conduct Authority and the Prudential Regulatory Authority published their 2018/19 business plans.

Brexit is central to both documents and sets out in detail how each authority will help move the UK regulatory system to an existence outside the EU.

The FCA’s Business Plan 2018/19 sets out the key activities that it intends to carry out. The plan is similar to the previous year’s plan as to priorities and focus, updated for the FCA’s progress on the reviews and work it has undertaken. It also builds on the FCA’s statement on the withdrawal agreement. As the FCA’s expected role in the EU withdrawal becomes more significant as the exit date looms, it has scaled back the number of new initiatives as Brexit becomes a key priority.

The PRA’s Business Plan 2018/19 sets out its strategy and work plan for the next year. As it is for the FCA, Brexit is a key consideration for the PRA and the Plan must be read alongside Policy Statement PS3/18 “International banks: the Prudential Regulation Authority’s approach to branch authorisation and supervision” published on 28 March 2018. This is a key document for any inward passporting EU27 bank planning for Brexit.

FCA Business Plan and Brexit

In Chapter 2 of the business plan the FCA’s notes that a significant proportion of its resources are already focused on Brexit, including arrangements to implement the change.

To fulfil its regulatory objectives and provide technical support to the Government in the run up to withdrawal, the FCA is committing £30m. While £5m will be found from reserves and £14m from “reprioritising, delaying or reducing non-critical activity”, £5m will be raised in additional general fees and £6m from fees charged to specific firms to recover the cost of new regulatory responsibilities, such as passporting and on-shoring credit rating agencies and trade repositories.

Working with the government

The FCA will:

• continue to support the Government and provide technical assistance to negotiations with the EU and other countries where the Government seeks a free trade agreement where it is appropriate for the FCA to be involved;

• provide technical advice on the legislation introduced by the Government;

• review the FCA Handbook in light of the legislative changes (including looking at the duty of care, which the FCA considered last year, and the potential for increased automation);

• advise the Treasury and other areas of the Government on how the UK’s future relationship with the EU may affect the financial services industry and its users;

• assess the impact of transitional arrangements on the UK’s regulated firms; and

• continue to liaise closely with the Bank of England.

Future functions

The FCA will ensure there is an appropriate transition to a future model for authorisation and supervision of EEA firms.

The FCA notes that HM Treasury has stated that it intends to provide the FCA with functions and powers for UK and non-UK credit-rating agencies and trade repositories. Currently, the oversight lies with the European Securities and Markets Authority.

Supervision and risk

The FCA will continue to:

• work with regulated firms to understand their plans for future operations and the impact on markets and consumers; and

• monitor the risks to its regulatory objectives and consider potential harms to consumers that may arise in the run-up to, and after, Brexit.

FCA operations

The FCA will work towards achieving operational readiness for Brexit.

International cooperation

The FCA will continue to work with regulatory authorities across the EU and globally to ensure appropriate supervisory cooperation.

FCA statement on Brexit

The FCA’s comments on Brexit in its business plan follow those in its statement of 28 March welcoming the agreement reached on the terms of an implementation period that will apply following the UK’s withdrawal from the European Union. As well as confirming that passporting will continue during the transitional period, the FCA said:

“In light of the agreement on the terms of an implementation period and HM Government’s commitment to providing for a Temporary Permission Regime as a backstop, firms and funds currently benefiting from an EU passport need not apply for authorisation at this stage.”

We believe that the FCA statement that EU firms and funds trading into the UK with the benefit of an EU passport need not apply for authorisation at this stage should be taken with a pinch of salt. The transition period will not arise unless there is an agreement on the Withdrawal Agreement as a whole. Despite the FCA statement we expect that there will be a rush to apply once the FCA announces a deadline and if you are an EEA firm or fund passporting into the UK we would urge you to continue with your Brexit contingency plans so as to be able to apply for recognition in good time.

The same day, Andrew Bailey, Chief Executive of the FCA gave a speech to the UK Parliament’s All Party Parliamentary Group on Wholesale Financial Services’ Annual Dinner in which he extolled the benefits of free trade in general and in financial services in particular, invoking the cross-party group of British parliamentarians who repealed the Corm Laws and ushered in the golden era of British free trade that lasted for over half a century from the 1840s:

“Open wholesale financial markets with appropriate regulatory standards operating to support the public interest are a global public good which benefits businesses everywhere.”

Bailey also advocated close engagement between the FCA, the European Supervisory Agencies and the EU Member States’ National Competent Authorities, a theme reflected in the UK Chancellor of the Exchequer’s speech on a UK-EU free trade agreement in financial services and the FCA’s business plan:

“To emphasise, engagement and goodwill between regulators can help to embed transition in a practical sense.”

PRA Business Plan and Brexit

The PRA’s statutory duties are:

• promoting the safety and soundness of PRA-authorised firms;

• securing of an appropriate degree of protection for those who are or may become policyholders of insurance firms; and

• to facilitate effective competition in the markets for services provided by PRA-authorised persons in carrying on regulated activities.

Amongst its strategic goals is the delivery of a smooth transition to a sustainable and resilient UK financial regulatory framework following the UK’s exit from the European Union.

The work the PRA will do to promote an orderly UK withdrawal from the European Union will fall into three main areas:

• working with the government to make sure the prudential rulebook remains fully operable and coherent as we leave;

• providing technical advice to the government in relation to its negotiations with the EU; and

• keeping well across firms’ plans to restructure across the border with the rest of the EU while aiming to ensure that the process for authorising the provision of financial services in the UK runs as smoothly as possible.

The foundation of the PRA’s approach remains the presumption that there will continue to be a high degree of supervisory cooperation between the UK and the EU, and that the openness of our global financial centre benefits both sides.

PRA Policy Statement PS3/18 on authorising and supervising branches of international banks

On 28 March the PRA published Policy Statement PS3/18 “International banks: the Prudential Regulation Authority’s approach to branch authorisation and supervision”. This sets out the PRA’s policy on whether a third country credit institution will require authorisation as a subsidiary. The PRA’s approach to the authorisation and supervision of third country branches includes the following considerations:

• whether the whole firm meets the PRA’s Threshold Conditions;

• the degree of equivalence of the home state supervisor’s regulatory regime in meeting international standards and delivering appropriate outcomes consistent with the PRA’s objectives;

• the degree of supervisory cooperation with the home state supervisor and the home resolution authority; and

• the extent to which the PRA, in consultation with the Bank of England acting in its capacity as the UK resolution authority, has appropriate assurance over the resolution arrangements for the firm and its UK operations.

As to the question of whether it would be more appropriate for the a third country firm to operate through a subsidiary rather than a branch and, in the case of wholesale firms, whether the question of “supervisability” arises, the following are relevant:

• For retail banks, the PRA considers retail deposit-taking activities to be significant where a firm: has more than £100 million of retail and small-company transactional or instant access account balances covered by the Financial Services Compensation Scheme; over 5,000 retail and small company customers; or undertakes deposit activity where the total potential liability to the FSCS in respect of covered deposits is in excess of £500 million. In general, the PRA will expect such activities to be undertaken in a subsidiary.

• For wholesale banks, in determining whether a branch that undertakes wholesale banking activities is systemically important, the PRA will consider, among other factors: whether it holds more than an average of £15 billion total gross assets including those traded or originated in the UK but booked remotely to another location; the critical functions it undertakes in the UK; and the overall complexity and inter-connectedness of the business undertaken in the branch, for example whether it provides significant operational services or is otherwise interconnected to a systemically important UK bank.

Impact

For FCA and PRA authorised firms, having in place clear Brexit contingency plans and being able to communicate those plans to the FCA and PRA, as the case may, remains key. In non-Brexit related matters, there may be less pressure as the FCA and PRA divert resources. For EU27 firms currently passporting into the UK, the extension through the transitional period will be helpful but they too will need to be planning, which includes engaging with the FCA and PRA and gaining an understanding of what FCA and PRA regulation will mean for them.

Previous Brexit eBriefings

• Brexit: One year to go - What has happened in the negotiations so far and what needs to happen next? – April 2018

• “Not a Dirty Word”: ESMA revisits the impact of its Opinion on delegation for UK managers if there is a “hard” Brexit – March 2018

• Keeping the present for a little longer: the impact of the Brexit Withdrawal Agreement on financial institutions – March 2018

• Preparing for Brexit: the impact of ESMA’s Opinion on Financial Institutions – June 2017

• An orderly Brexit? The trouble with talking about transitionals – May 2017

• Brexit and the Supreme Court: what now for financial institutions? – January 2017

• Brexit and Basel III: an invitation for more or for less? – September 2016

• Brexit: Implications for Financial Services – July 2016

• The FCA’s BREXIT statement: An incomplete explanation of the short term legal impact on UK financial services? – June 2016

How can Eversheds Sutherland help?

Since June 2016, our lawyers and consultants have advised various institutions passporting into the UK from EU27 Member States and passporting from the UK into the EU27 on Brexit planning and Brexit related issues, including advice and assistance on applications to the FCA and PRA.

We would be happy to discuss how we can help you with your Brexit planning and execution of those plans.

For more information contact

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