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Eversheds Sutherland Financial Services Brexit Round Up week ending 29 June

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


It has been a busy week for Brexit. The European Union (Withdrawal) Act 2018 (“EUWA 2018”) finally received Royal Assent. HM Treasury (“HMT”), the Bank of England (“BoE”) and the Financial Conduct Authority (“FCA”) all issued guidance on how they will use their powers under EUWA 2018 to bring forward statutory instruments for the purpose of ensuring that “the UK continues to have a functioning financial services regulatory regime in all scenarios.” Meanwhile Mark Carney of the BoE and Andrew Bailey of the FCA made comments that reflected the recent more strident tone towards the Commission that the Prime Minister and Chancellor of the Exchequer have been taking. All of this against the background of the June EU Council, where Brexit negotiations continue.

EU (Withdrawal) Act 2018 obtains Royal Assent

As posted on Linked In and Twitter.

EUWA 2018 points to note

Repeal of European Communities Act 1972 (“ECA 1972”), s 1 EUWA 2018

Will occur on exit day, which is defined as 11.00 pm on 29 March 2019 unless a Minister of the Crown makes a regulation to amend this definition to ensure that the time and day corresponds to the actual day and time that the European Treaties cease to apply to the UK.

Continuation of EU law in UK, ss 2-3 EUWA 2018

EU law already implemented in the UK will continue to have effect in domestic law after exit day and EU regulations (which, as directly effective EU law, would otherwise fall away) will be transposed into UK domestic law after exit.

Secondary legislation powers, s 8 and sch 7 EUWA 2018

Ministers have delegated authority to issue secondary legislation (called statutory instruments) to correct deficiencies or operational failures in the transposed law. The Chancellor of the Exchequer has further delegated these powers to the BoE, FCA and Payment Systems Regulator (“PSR”) for the purposes of ensuring that the regulatory regime for financial services functions regardless of the nature of the UK’s exit from the EU.

Government bodies refer to the process of transposing EU law into UK law as “onshoring”.

Parliamentary approval of the outcome of the Brexit negotiations, s 13 EUWA 2018

This does not amount to parliament being able to veto the deal agreed by the UK Government (“HMG”). It assumes a new deadline of 21 January 2019: if by that date no agreement in principle is reached on the substance of the UK’s withdrawal and the future trading relationship with the EU, then there are different technical arrangements in respect of Parliament’s role in debating how HMG should proceed.

Interpretation Act 1978

This will be amended to include new definitions to cover the concepts and processes of the UK’s withdrawal from the EU.

Coming into force

Only some of the sections of the Act come into force on Royal Assent. The other provisions, such as repeal of the ECA 1972, come into force on dates to be appointed.

The most significant provision that has come into force is section 8 and associated provisions that permit ministers to start the process of issuing draft regulations for amending transposed EU law.

HMT, BoE and FCA have each made statements about how they intend to use these powers to bring forward statutory instruments for consultation by this autumn1.

EUWA 2018 primary sources

To read the Act, click here.

To read the Explanatory Notes to the Act, click here.

To read the DExEU press release, click here.

HMT, BoE and FCA statements about statutory instruments under EUWA 2018

HMT, FCA and BoE all put out co-ordinated statements explaining how they intend to use the powers given to Ministers under the EUWA to ensure that in the event of there being no withdrawal agreement (and thus no implementation agreement in place) when the UK leaves the EU, there will be a workable legal regime in place for financial services, while equally stressing that they expect HMG to obtain such a withdrawal agreement.

Should the UK leave the EU without a deal, a system of temporary permissions for firms and financial market infrastructures such as central counterparties (“CCPs”) will be put in place, so that all involved can continue to operate as normally while applying for formal recognition. Accordingly, HMT, FCA and BoE state firms operating in or interacting with the UK financial markets need not take immediate steps to make preparations for a no deal Brexit, although we believe that market participants should ensure that they should ensure that they are in a state of preparedness to apply for recognition should there be a no deal Brexit.

This is in stark contrast to the European Supervisory Authorities (EBA, ESMA and EOIPA)2 which are advising market participants to make preparations now should they want to continue to have access to the EU27 financial markets.

HMT statement

HMT explains that it expects there to be a withdrawal agreement including an implementation period:

“The government is confident that the implementation period, agreed between the UK and the EU earlier this year, will be in place between 29 March 2019 and 31 December 2020. Nevertheless, the government will ensure that a workable legal regime is in operation whatever the outcome of negotiations.”

During the implementation period:

“EU financial services firms operating in the UK, and UK financial services firms operating in the EU, will be able to continue to undertake regulated activities, either by means of passporting rights or under other relevant EU frameworks. Similarly, UK financial market infrastructures that are authorised under the existing EU framework, such as central counterparties, will continue to be able to provide services to the EU. EU and third country (non-EU) financial market infrastructures that have existing authorisation or recognition under EU legislation will continue to be able to provide services to the UK, enabling access to financial market infrastructures without disruption.”

However, should this not be agreed:

“The government is continuing this work to ensure that the UK will have a functioning legislative and regulatory framework in all scenarios. As part of this, HM Treasury intends to legislate to provide the financial services regulators with powers to introduce transitional measures that they could use to phase in any onshoring changes.”

The provisions for the transposition of existing EU law into UK law under the EUWA do not deal with the detail of ensuring that law will work following transposition and there will inevitably be deficiencies in that law as transposed. To that end the EUWA gives Ministers the power to make secondary legislation in the form of statutory instruments (“SIs”) to resolve those deficiencies.

HMT gives the following non-exhaustive list of examples of deficiencies which it intends to resolve using SIs:

• functions that are currently carried out by EU authorities would no longer apply to the UK (for example, supervision of trade repositories, which HM Treasury proposes to transfer to the Financial Conduct Authority)

• provisions in retained EU law that would become redundant (for example, references to European Consumer Credit Information and Member States)

• provisions that would be inconsistent with ensuring a functioning regulatory framework – for example, requirements regarding automatic recognition of an action by an EU body by the relevant UK body – where alternative arrangements for cooperating with EU bodies would be more appropriate

• provisions that would lead to significant disruption for firms or customers of firms, unless action is taken to avoid that disruption (for example, to prevent the market disruption that would result from the sudden inoperability of passporting rights)

• provisions requiring participation in EU institutions, bodies, offices and agencies (for example, joint decision making in supervisory and resolution colleges) which would no longer work after exit

In order to achieve this HMT intends to draft its own SIs and to delegate responsibility to the BoE and FCA for drafting further SIs which HMT will review and approve. HMT also intends to use and SI to sub-delegate the responsibility for maintaining the regulatory rulebooks to the financial regulators:

“After exit, HM Treasury proposes that the regulators take on responsibility for maintaining binding technical standards (“BTS”). Under this proposal, when one of the regulators proposes a change to BTS, HM Treasury will be required to approve the instrument that gives effect to the change. HM Treasury may not approve a proposed change to BTS if it appeared to the Treasury that the proposal would have implications for public funds or would prejudice negotiations for an international agreement.”

“HM Treasury intends to lay the first financial services onshoring SIs soon. Among the first SIs laid will be the SIs delivering the Temporary Permissions Regime, the Temporary Recognition Regime for central counterparties and the SI sub-delegating the power to fix deficiencies in BTS and regulator rulebooks to the financial services regulators.”

To read the HMT guidance, click here.

The FCA’s statement

The FCA plan to amend their handbook as soon as they can:

“We will also be amending our Handbook to ensure it is consistent with changes the Government is making to EU law and it functions effectively when the UK leaves the EU. In the run up to March 2019, we will limit Handbook changes unrelated to Brexit to those identified as core priorities in our Business Plan as well as other essential items.

“We plan to consult on these changes in the Autumn, subject to the Treasury’s timelines for Statutory Instruments (SIs). We also plan to consult on the rules which will apply to firms in the temporary permissions regime.”

The key message from the FCA, which has been repeated by Andrew Bailey in a number of recent speeches:

“This means we do not expect firms and other regulated entities providing services within the UK’s regulatory remit to have to prepare now to implement these new requirements.”

To read the FCA statement, click here.

The Bank of England’s press release

The BoE takes the same line:

“The Bank as regulator intends to consult, in co-ordination with the FCA when appropriate, on proposed changes to onshored BTS and rules this autumn. We plan to do this following HMT’s publication in draft, or laying before parliament, of SIs relating to most of our regulatory remits. This will allow firms, including financial market infrastructures (“FMIs”), to be able to review and comment upon the proposed changes to BTS and the regulators’ rulebooks in the context of HMT’s proposed amendments to relevant onshored legislation. The changes set out in HMT’s SIs, and the Bank’s changes to BTS and rules, would largely only come into force on 29 March 2019 in the eventuality that the implementation period is not put in place.

“We do not expect firms providing services within the UK’s regulatory remit to have to prepare now to implement these changes. HMT has set out that it intends to provide regulators with powers to grant transitional relief, where appropriate, to ensure that, in a scenario in which an implementation period is not in place, firms and FMIs have sufficient time to comply with the changes.

“Against the possibility that the implementation period does not take effect on the 29 March 2019, HMT today confirmed that it will bring forward legislation under the EUWA shortly to create temporary permissions and recognition regimes. This will allow firms, including non-UK central counterparties, to continue their activities in the UK for a time-limited period after the UK has left the EU even if there is no implementation period. Those firms that wish to continue carrying out business in the UK in the longer term will also be able to use this time limited period to seek to obtain full authorisation (or recognition) from UK regulators without disruption to their business.”

To read the BoE press release, click here.

Opinion of the European Banking Authority on preparations for the withdrawal of the United Kingdom from the European Union

The EBA has issued and opinion to the NCAs on preparations for Brexit warning that financial institutions must do more to prepare for the possibility of a no deal Brexit in March 2019. The EBA sets out a long list of risks that should be identified and a requirement that the institutions should write to their customers explaining those risks and the steps they are talking to minimise those risks no later than the end of 2018.

To read the opinion, click here.

Andrew Bailey, CEO at the FCA respectfully says EBA are wrong and preparations for Brexit are well in hand in the UK

Speaking at The Times CEO Summit in London, Bailey said:

“The idea that institutions in London have done no preparation, no thinking about Brexit, I’m afraid, and with all due respect to the EBA, is considerably wide of the mark.”

“The idea that we leave firms to deal with transitional risk is wrong.”

The UK has offered financial institutions “interim permissions” so that they can continue to trade if there is either a no deal Brexit or if there is a Withdrawal Agreement including the Transitional Period but no deal on financial services in place at the end of the Transitional Period. In contrast the EBA says financial institutions should make their own contingency plans, a policy which the Chancellor of Exchequer believes has been chosen in the hope of forcing financial institutions to relocate to the EU27.

To read The Times article, click here3.

BoE Governor Mark Carney criticises EU for failure to take sufficient steps to deal with hazards around derivative contracts

The tone of HMG towards the EU on financial services has recently changed. This can be seen in Bailey’s speech above and the Chancellor of the Exchequer’s recent Mansion House speech, where he said:

“And I will be frank. I do not consider some of the measures currently under consideration in the EU on third country regimes for CCPs or some of the proposals put forward in the European Parliament on restricting investment firms, to represent “enhancements”. Because these proposals have nothing to do with equivalence. And everything to do with an ambition to force the location of business into the Eurozone.”

Carney too took a more strident approach to the EU while speaking at the Bank's biannual report on financial stability.

Noting that the hazards around derivative contracts are "the biggest remaining risks of disruption" as the UK leaves the EU in March 2019 and could cause credit costs to surge, Carney said:

"The EU has not yet indicated their solution to these fundamental issues which would be expected to have more material impacts on the costs and availability of finance on the continent in the unlikely event of a disorderly Brexit.”

To read the Chancellor’s Mansion House speech, click here.

To watch a YouTube video of Mark Carney’s speech, click here.

To read the Telegraph article quoting Carney, click here4.

How Eversheds Sutherland can 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.

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

  1. Bear in mind that HMT takes the view that Autumn consists of the months of October, November and December, so this is not quite as soon as it may first appear.
  2. European Banking Authority, European Securities and Markets Authority, European Insurance and Occupational Pensions Authority.
  3. A subscription may be required.
  4. A subscription may be required.


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