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Eversheds Sutherland Financial Services Update - Week ending 9th November 2018

Eversheds Sutherland Financial Services Update - Week ending 9th November 2018

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



While a UK-EU deal on financial services after Brexit remains tantalisingly close, even if only some form of enhanced equivalence can be expected at best, rather than the full mutual recognition once hoped for, the UK is continuing with the business of preparing its financial services regulation for a no deal Brexit. The ESAs appear finally also to have realised that they too must make such preparations.

Brexit – general

FCA’s Nausicaa Delfas, Executive Director of International at the City and Financial speaks at 3rd UK Financial Services Brexit Summit

On onshoring EU regulation

“We have set out the proposed changes that would need to be made to the Handbook and Binding Technical Standards that will be transferred to us from the European Supervisory Authorities (what we call onshoring). In line with the wider Government approach, we do not propose substantive policy changes. Our changes are consequential, for example removing from our Handbook references to the EU institutions and replacing them with the UK equivalent.

“Also in line with the wider Government approach, we are taking the baseline view that our rules must treat the EU as a third country. As the Government has done, there are some cases where we have derogated from the baseline approach, where that is in line with our objectives. For example, in the context of UK UCITS (which in some cases make a distinction between investments in EEA assets and investments in the rest of the world) treating EEA states as third countries could have caused disruption for some funds, and for investors. In our consultation, we therefore propose to allow UK UCITS schemes to keep the same freedom to invest in EEA assets as they do now.”

On new regulatory responsibilities

“In leaving the EU, we will be taking on new regulatory responsibilities – for example ESMA’s regulatory responsibilities in relation to Credit Rating Agencies (CRAs) and Trade Repositories (TRs). We have published statements on how Credit Rating Agencies and Trade Repositories can register with us before exit day. These involve allowing CRAs and TRs established in the UK to convert their ESMA registrations into registration with us (a conversion regime), as well as offering temporary registration to CRAs and TRs if they are a UK subsidiary of a group with an existing ESMA registration. We have also set out our approach to temporary authorisations of Data Reporting Service Providers (entities that provide a data reporting service under MiFID) and clarified how firms can apply for recognition as an overseas investment exchange.”

On regulated firms’ obligations to overseas customers

“Our consumer objective goes beyond consumers in the UK. It is relevant to consumers elsewhere served by UK firms, whatever their nationality. We cannot of course make rules which override those in the EU or require legislation. But there are things we can do, and we are doing, to secure an appropriate degree of protection for consumers. For example, we have made clear to CEOs of large international banks that for their non-EU clients, they should only consider moving activity away from the UK if it is demonstrably in the interests of the client to do so. We have also given our public support to the statement by Lloyd’s of London that, in the event of the UK leaving the EU with no transition or implementation period, Lloyd’s underwriters will continue to honour their contractual commitments including the payment of valid claims, whilst its Part VII process is underway.”

On Brexit as an opportunity to raise regulatory standards

“We have been clear that we do not see leaving the EU as an opportunity to join a race to the bottom in regulatory standards – in fact, it’s quite the contrary. We know that you and your consumers need high quality, predictable, stable regulation to thrive and support the needs of your customers. We will work with our global counterparts to develop and implement standards which are strong but flexible enough to enable competition and innovation.”

In questions following the speech Delfas said that 1,300 firms have so far expressed an interest in joining the TPR.

To read the speech, click here.

To read the CityAM article, click here.

Court sanctions complex AIG dual insurance business transfer and cross border merger: Re AIG Europe Ltd and another [2018] EWHC 2818 (Ch)

AIG is seeking to separate its UK and ex EU insurance business from its EU27 and Swiss insurance business into separate corporate vehicles using an insurance business transfer (IBT) under Part VII FSMA 2000, followed by a relocation of its EU27 insurance business to Luxembourg via the medium of a cross border merger between the new corporate vehicle and a Luxembourg corporate vehicle under the EU Cross-Border Merger Regulations. The intention is to create a corporate structure which will operate seamlessly following a possible no deal/WTO Brexit under which AIG would not be able to use UK entities to service customers in the EU27 and vice versa. A cross-border merger was chosen as the means for the onward transfer as the recognition of the merged entity as successor of the UK corporate eases the transition of contracts and offers certain tax advantages.

The UK court was asked to approve the novel application, which involved the transfer of insurance business to more than one corporate entity and approval of the first stages of the cross-border merger plan (the completion of which will require approval by the Luxembourg regulator).

The court obliged, noting while that such novel and complex schemes were within the flexible remit granted by FSMA 2000, other parties seeking to take similar steps should be mindful to give the court officers sufficient warning of the presentation of such a scheme to allow the court to find a suitable judge and to permit that judge sufficient reading in time to fully assess the scheme.

Summary of the Written Observations of the United Kingdom in the preliminary reference proceedings before CJEU of Wightman and Ors v Secretary of State for Exiting the European Union

HMG has released a summary of its submissions to the CJEU in respect of the case referred to it by the Inner Court of the Court of Sessions (the highest court in Scotland) asking for an answer to the hypothetical question of whether HMG can unilaterally revoke the Art 50 notice.

“The United Kingdom Government contests the admissibility of these Questions which amount on any view to a request for an “advisory opinion”, on the basis that the CJEU has long refused for very good reasons (a) to answer hypothetical questions; or (b) to provide advisory opinions.”

“Nothing about the “Brexit context” of this case detracts from such principles.”

“It remains a matter of firm policy that we will not be revoking the Article 50 notice. The Government is also seeking permission to appeal the decision of the Inner House of the Court of Session in Scotland to the Supreme Court.”

To read the summary, click here.

To read the DExEU press release, click here.

Jargonbuster – FEP – Future Economic Partnership

HMG’s term for the UK’s Relationship Agreement with the EU following Brexit, details of which will be included in the non-binding political statement in the Withdrawal Agreement. How detailed this will be is as yet unknown, with suggestions that it might be as short as 5 pages or as long as 50 pages. What relationship the eventual FEP will bear to the political statement is obviously uncertain, but if the transition from political agreement on the withdrawal agreement to actual text is a guide, the relationship may be rather loose.

Andrew Bailey of FCA speech at the City Banquet - Brexit and financial services: where have we got to?

On MoUs:

“we urgently need the engagement of our EU counterparts so that we can put in place Memorandums of Understanding (MoUs) and other important practical arrangements. This is not just a self-serving UK point; it applies to both sides. MoUs will support cross border supervision of firms and data sharing will support our ability to jointly oversee markets.”

On cross-border regulatory co-operation:

“More generally, I would like to thank Steven [Maijoor] and our counterparts in national authorities in the EU for continuing the very constructive engagement. That’s the spirit to which we at the FCA are committed and we will do all we can to support continued cooperation. From time to time I read recommendations that post-Brexit UK regulators must engage internationally and punch our weight. I can assure you, we already do.”

On treating customers fairly in the context of Brexit:

“we have given our public support to the statement by Lloyd’s of London that in the event of the UK leaving the EU with no transition or implementation period, Lloyd’s underwriters will continue to honour their contractual commitments including the payment of valid claims. This goes to the heart of treating customers fairly. To say the alternative, that valid claims will not be met, would not be consistent with our objectives as the UK conduct regulator and it would violate the tradition of the City of London. To be clear, this is not to deny there are cliff-edge risks to a sudden and hard Brexit transition. There are. But the time to analyse them is over. We have to deal with them and solve the problems we face.

“My second example is that we have made it clear to the large international banks operating here that for non-EU clients they should only consider moving activity away from the UK if it is demonstrably in the interests of the client to do so. This is not a matter of being wilfully disruptive; it’s what our objectives mean. It’s about treating customers fairly. Brexit does not override these objectives given to the FCA in statute by the UK Parliament.”

It isn’t for regulators to seek to dictate business practices outside their jurisdiction:

“I strongly support the view that broad equivalence of protections should enable market access and not require unnecessary imposition of home country rules on business done elsewhere. This is part of a much wider debate about how we preserve and build open financial markets, into which Brexit comes as a catalyst to prompt faster determination of the way ahead. But, to be clear, it is not uniquely a Brexit issue – it is much broader than that. The key point for me here is that we – whether it be the UK authorities, EU, US or anyone else for that matter – should avoid a world where we regard it as normal to tell our market participants, corporate treasurers etc where they cannot and therefore can do business. I am an unashamed free trader.”

What future arrangements should look like:

“Whatever approach we take, there are a couple of tests that I think the arrangement should need to pass. The first is that we can appropriately tailor our regulatory system to particular features of our markets. And second, we can change and adapt the system as markets change, and amend our rules when – as happens from time to time – they don’t quite work as we intended when applied in practice.

“If I had to name an area where I would criticise the EU approach, it is the ability to amend and adjust and recognise the need to do so more rapidly.”

To read the speech, click here.

To read the FundsEurope article, click here.

BoE/PRA CP25/18: The Bank of England’s approach to amending financial services legislation under the European Union (Withdrawal) Act 2018 (the “NtA approach CP”)

“This Bank of England (Bank) consultation paper (CP) sets out the general approach the Bank proposes to adopt to ensure a functioning legal framework when the UK leaves the European Union (EU).

“This consultation is relevant to all firms authorised and regulated by the Prudential Regulation Authority (PRA), as well as financial market infrastructure providers (FMIs) that are currently supervised by the Bank. Some of the proposals are also relevant to firms authorised and regulated by the Financial Conduct Authority (FCA), and to the Financial Services Compensation Scheme (FSCS). The consultation is also relevant to firms that might seek to apply to the PRA or FCA for authorisation, and to FMIs that might apply to the Bank for recognition.”

“The proposed changes are to ensure that there is a functioning legal framework for UK financial regulation when the UK leaves the EU. They do not reflect any change in Bank or PRA policy, except to reflect the UK’s withdrawal from the EU. The Bank proposes to follow the general approach to onshoring adopted by Government under the Act. In particular, Government has indicated that its general approach is that, in the scenario that the UK leaves the EU without a deal, the UK would default to treating the EU and its Member States in the same way as other ‘third countries’. Exceptions would be made to that default approach where appropriate – including where this is justified in order to ensure financial stability, or to minimise disruption and avoid material unintended consequences for the continuity of service provision to UK customers, investors and the market.”

To read CP25/18, click here.

To visit the BoE webpage, click here.

BoE/PRA CP26/18: UK withdrawal from the EU: Changes to PRA Rulebook and onshored Binding Technical Standards

“This consultation paper (CP) sets out the Prudential Regulation Authority’s (PRA) proposals to fix deficiencies arising from the UK’s withdrawal from the EU in the PRA Rulebook, and in relation to Binding Technical Standards (BTS) within the PRA’s remit that will be converted, or ‘onshored’, into UK law. It also sets out the PRA’s proposals on how existing non-binding PRA materials, including supervisory statements (SS), statements of policy (SoP), and the PRA approach documents should be read by firms when the UK leaves the EU. The changes proposed in this CP are amendments to ensure an operable legal framework after the UK leaves the EU.

“This CP is relevant to all firms authorised and regulated by the PRA, as well as firms that are expected to have deemed permission under the ‘temporary permissions regime’ (TPR) or that seek to apply for PRA authorisation in future.”

To read CP26/18, click here.

To visit the BoE webpage, click here.

AFME letter to European Commission and blogpost demanding action to avoid no deal Brexit cliff edge risks

While HMG is taking active steps to mitigate any cliff edge risks of a no deal Brexit in relation to financial services, the European Commission has by and large contented itself with identifying the risks rather than taking steps to address them, recent positive statements by Stephen Maijoor about the desirability of a temporary recognition regime for CCPs notwithstanding.

AFME identify the following three risks which the industry cannot resolve itself and which the Commission should be taking steps to address:

Continued access to central counterparties

• “In the absence of transitional arrangements, or recognition under the European Market Infrastructure Regulation (EMIR), UK CCPs would no longer be authorised to perform clearing services under EU law and EU27 firms would no longer be able to satisfy their clearing obligations through a UK CCP. A solution is urgently required to ensure that there is no gap in the ability to access CCPs and to avoid increased capital requirements.”

• “There is a real risk that, in the absence of clarity on a solution, UK CCPs may have to start the process of delivering termination notices to their EU27 clearing participants as early as December to ensure that they will continue to comply with the law.”

Continued servicing of existing contracts

• “While firms should be able to continue to perform contractual obligations under existing contracts for OTC derivatives in most member states, it may not be possible to perform essential ‘lifecycle’ events. These include the exercise of options, transfers of collateral, unwinds or portfolio compression. Such lifecycle events occur frequently and the inability to perform them could impair the ability of banks and clients to manage exposures and risks, which is important to both to market participants and regulators.”

• The European Parliament’s Brexit spokesperson Guy Verhofstadt’s view is that as some lifecycle events create new contracts, this isn’t a point that requires addressing. While legally correct, this approach cuts across market practice and the understanding of market participants.

Cross-border data transfers

• “If the European Commission deems a third country to have an ‘adequate’ data protection framework in place, then data transfers between Europe and that third country can continue uninhibited. However, a full assessment could only happen after the UK has actually left the EU. We would like to see adequacy determinations initiated by the EU27 and the UK as soon as practicable ahead of the UK’s exit. We also urge the relevant authorities to commit to providing a temporary solution to ensure that there is no gap following the UK’s withdrawal given that the additional safeguards in the GDPR can be costly and lengthy to implement.”

To read the letter, click here.

To read the blogpost, click here.

Was Brexit foreseeable? Canary Wharf Group v European Medicines Agency

In this case where the EMA is arguing that its lease from Canary Wharf Group will be frustrated by Brexit, the trial judge has ruled that evidence should be obtained from historians on the “foreseeability” of Brexit. This is likely part of the EMA’s plan to distinguish the case of Armchair Answercall Ltd v People in Mind Ltd [2016] EWCA Civ 1039 where the fact that the alleged frustrating event should have been foreseen by the parties meant the contract was held not to be frustrated. The case is not scheduled to be heard until early next year.

Brexit – statutory instruments

Financial Regulators' Powers (Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018 made

“For certain EU ‘Level 2’ technical rules on financial services, known as Binding Technical Standards (BTS), HM Treasury proposes to transfer ongoing responsibility from the European Supervisory Authorities to the UK financial regulators – the Bank of England, the Prudential Regulation Authority (PRA), the Financial Conduct Authority (FCA) and the Payment Systems Regulator (PSR). BTS, running to several thousand pages, do not set overall policy direction but fill out the technical detail of how the requirements set in parent legislation (referred to as Level 1 legislation) are to be met. Having played an important role in the EU to develop these standards, through their membership of the Boards and working groups of the European Supervisory Authorities, UK regulators have the necessary expertise and resource to maintain BTS after the UK’s exit from the EU. This allocation of responsibility would be consistent with the general rule-making responsibilities already delegated to the FCA and PRA by Parliament under FSMA.”

To read the SI, click here.

To read the explanatory memorandum, click here.

Draft EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018

“These Regulations repeal EEA Passport Rights under Schedule 3 to the Financial Services and Markets Act 2000 (the “2000 Act”) and Treaty Rights under Schedule 4 to that Act. A person with an EEA Passport Right or a Treaty Right is one who is authorised in the person’s home EEA state to carry on a regulated activity and, as a result, may become authorised to carry on a regulated activity (see section 22 of the 2000 Act) in the United Kingdom. Reciprocal arrangements are provided by European Union member states.

“These reciprocal arrangements will cease when the United Kingdom ceases to be a member of the European Union, and it is not considered appropriate that a person should thereafter carry on a regulated activity in the United Kingdom unless the person is authorised by a domestic financial services regulator. Accordingly, these arrangements represent a deficiency in retained EU law (see section 8(2)(c) of the European Union (Withdrawal) Act 2018).

“These Regulations also make transitional provision so that a person who ceases to be authorised to carry on a regulated activity in the United Kingdom by virtue of an EEA Passport Right or a Treaty Right may continue, for a limited time, to carry on such an activity.”

To read the draft SI, click here.

To read the explanatory memorandum, click here.

Draft Payment Accounts (Amendment) (EU Exit) Regulations 2018

Basic bank accounts will be maintained, but UK providers of basic bank accounts will no longer be required to provide basic bank accounts to EU nationals not resident in the UK.

To read the draft SI, click here.

To read the explanatory memorandum, click here.

Draft Financial Markets and Insolvency (Amendment and Transitional Provision) (EU Exit) Regulations 2018

Preserves the Settlement Finality Regulations (SFRs), the Financial Collateral Arrangements Regulations and existing UK financial markets and insolvency regulations. The majority of changes confirm the scope of this legislation and remove EU references. Also sets up a three year temporary designation regime for EEA systems which currently benefit from the SFR.

To read the draft SI, click here.

To read the explanatory memorandum, click here.

Draft Trade Repositories (Amendment and Transitional Provision) (EU Exit) Regulations 2018

The main deficiency that the SI seeks to amend is the European Securities and Markets Authority (ESMA) functions concerning the registrations of trade repositories (TRs) within the European Union, including UK TRs. The ESMA powers pass to the FCA, a temporary recognition regime is introduced and a procedure for converting ESMA registered TRs to UK registered TRs introduced.

To read the draft SI, click here.

To read the explanatory memorandum, click here.

Draft statutory instruments for EuVECA and EuSEF Regulations

Among other things, the Regulations:

• Confirm that UK fund managers will be able to register or be authorised with the FCA to market qualifying funds in the UK under new labels (social entrepreneurship funds (SEF), registered venture capital funds (RVECA) and long-term investment funds (LTIF)). Existing UK managers that are already registered or authorised with the FCA will be automatically transferred to the new UK regime

• Maintain existing investment rules for EUVECAs, EuSEFs and ELTIFs domiciled in the UK

• Remove existing legislative provisions relating to co-operation and sharing information with EU authorities

To read the draft EuVECA SI, click here.

To read the draft EuSEF SI, click here.

To read the explanatory memorandum, click here.

Draft Companies, Limited Liability Partnerships and Partnerships (Amendment etc.) (EU Exit) Regulations 2018

Changes are being made to the Companies Act 2006 and supporting secondary legislation because on exit day they will no longer operate effectively and therefore will require technical amendments to make them operable.

Some provisions will not be appropriate without a negotiated agreement with the EU, and the amendments need to be made to reflect the UK’s position outside of the single market and common framework in the area of company law and to ensure that the UK does not provide more preferential treatment to EEA companies, preventing a breach of the World Trade Organisation’s Most Favoured Nation rules.

The changes will ensure that the UK’s company law framework can continue to provide a functioning, clear system for companies and affected businesses after exit day.

To read the draft SI, click here.

To read the explanatory memorandum, click here.

Draft Central Securities Depositories (Amendment) (EU Exit) Regulations 2018

To ensure the UK retains an operative regulatory framework for CSDs post exit, this SI does the following in relation to onshoring the Central Securities Depositories Regulation (EU 909/2014):

• Makes technical changes to ensure that the UK retains an operative regulatory framework for CSDs in the event of a no deal scenario

• Transfers the power to make equivalence decisions from the Commission to HM Treasury

• Transfers powers from the European Securities and Markets Authority (“ESMA”) to the Bank of England enabling the Bank of England to recognise third country CSDs post exit

• Provides a transitional regime so that third country CSDs can continue to provide services to UK firms after exit

To read the draft SI, click here.

To read the explanatory memorandum, click here.

Draft Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018

“The SI amends aspects of the onshored EMIR and related UK legislation to ensure that the UK continues to have an effective regulatory framework for OTC derivatives, CCPs and TRs in a no-deal scenario. This SI will also ensure that the UK upholds its international commitments.”

Deficiencies to be remedied by the SI:

• Transfer of ESMA functions to HMT, FCA and PRA

• HMT to determine equivalence and adopt all Commission equivalence decisions made before exit day

• Transfer of oversight of obligation to clear derivatives through a recognised CCP to BoE

• Transfer of oversight of TR reporting obligations to the FCA

• Transfer of oversight of OTCs including margin obligations to PRA and FCA

o if EMIR REFIT has reinstated the clearing exemption for pensions by exit day this will be onshored

• Amendment or deletion of process and requirements for co-operation between UK and EEA regulators

• New provisions relating to supervision of TRs, similar to approach for credit rating agencies

• Deletion of EMIR references to supervisory colleges, of which UK will no longer be a member

To read the draft SI, click here.

To read the explanatory information, click here.

How can ES 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.

For more information contact

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