The European Union (Withdrawal) Act (the “EUWA“), which repeals the 1972 European Communities Act and makes provision with regard to the UK’s withdrawal from the EU, received Royal Assent and officially became law on 26 June 2018. On 27 June 2018, HM Treasury, the Financial Conduct Authority (“FCA“), the Bank of England (“BoE“) and the Payment Systems Regulator (“PSR“) published statements on their respective approaches to the UK financial services legislation in light of Brexit.
HM Treasury Approach
An implementation period has been agreed between the UK and EU, which will run from 29 March 2019 until 31 December 2020. During that time, the UK will have to comply with existing EU rules, continue to implement new ones, but will also continue to be treated as part of the EU single market.
HM Treasury urges for a deep and special future partnership with the EU, stability with regards to recognition of equivalence and an open and collaborative relationship between supervisors. It also confirms the government’s intention to introduce a new bill, the Withdrawal Agreement and Implementation Bill, which will transpose the Withdrawal Agreement with the EU into national law.
HM Treasury advises firms to continue to plan on the assumption that an implementation period will be in place from 29 March 2019 – and, therefore, that they will be able to trade on the same terms that they do now until December 2020. While confident that a deal will be concluded with the EU, the government must still prepare for all eventualities, including a “no-deal” scenario. To that end, HM Treasury plans to use its powers under the EUWA.
The EUWA converts the existing directly applicable EU rules into UK domestic law and preserves UK law that previously implemented EU Directives. As a contingency measure, the EUWA also gives ministers powers to prevent, remedy or mitigate any failure of EU law to operate effectively, or any other deficiency in retained EU law, through Statutory Instruments (“SIs“). Such powers are time-limited (for two years after the exit date) and SIs are only intended to smooth the Brexit transition and not to make policy changes. HM Treasury also plans to delegate powers to the UK’s financial services regulators in order for them to address deficiencies in their respective rulebooks and to introduce transitional contingency measures (“onshoring“).
HM Treasury’s approach is for the same laws and rules, as currently applicable in the UK, to continue to apply at the point of exit. However, some changes are required in order to reflect the UK’s new position outside the EU.
The deficiencies identified by HM Treasury include the following:
- functions that are currently carried out by EU authorities that would no longer apply to the UK;
- certain provisions in retained EU law that would become redundant;
- certain provisions that would be inconsistent with ensuring a functioning regulatory framework;
- certain provisions that would lead to significant disruption for firms or customers of firms; and
- certain provisions requiring participation in EU institutions, bodies, offices and agencies.
Should the UK leave the EU without a deal, the UK’s position in relation to the EU, as confirmed by the European Commission, would be determined by the default member state and EU rules applicable to third countries. Similarly, the UK would default to, in principle, treating EU member states under its third country frameworks, including the Financial Services and Markets Act 2000, the Banking Act 2009 and the Bank of England Act 1998.
For cases where such third country frameworks prove insufficient, HM Treasury identified an alternative approach in order to manage the transition. This approach is based on the following principles:
- having a functioning legislative and regulatory regime in place;
- enabling regulators and firms to be ready by minimising disruption and avoiding material unintended consequences for the continuity of service provision to UK customers, investors and the market;
- protecting the existing rights of UK consumers; and
- ensuring financial stability.
HM Treasury noted that the introduction of a Temporary Permissions Regime (“TPR“), as initially announced in December 2017, is advisable in order to allow EEA firms to continue operating in the UK for a time-limited period after Brexit. It also mentioned that the government intends to introduce further specific transitional regimes for entities operating cross-border and outside of the passporting framework.
The first financial services SIs, including 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 EU Binding Technical Standards (“BTS“) and regulator rulebooks to the financial services regulators, will be laid soon. Further SIs will be laid over the Autumn into early 2019.
FCA, BoE and PSR Approach
HM Treasury’s statement was followed by similar statements issued by the FCA, the BoE and the PSR. All three statements repeat the key points already raised by HM Treasury and focus particularly on their recently delegated tasks to amend and maintain the BTS and to update their respective rulebooks. The three regulatory bodies announced that consultations will be launched in order to determine how such amends will be introduced.
It is worth noting that the FCA announced that some of their initiatives, such as their work on illiquid assets or the remit of Independent Governance Committees, will be pushed back. However, the FCA will continue working on initiatives, such as their High-Cost Credit Review, the implementation of the Senior Managers and Certification Regime and next steps from their Asset Management Market Study.