On October 8, 2018, HM Treasury published explanatory guidance on a proposed U.K. regulation to onshore EU legislation on CRAs in the event of a "no deal" scenario resulting from the EU-U.K. Brexit negotiations. If no deal is reached, the U.K. exits the EU on March 29, 2019. The draft statutory instrument is still being prepared and the approach as set out in the guidance may change as a result. It is expected that the draft SI will be published and also laid before Parliament before the end of the year.
The EU Credit Rating Agencies Regulation regulates CRAs established in the EU. ESMA directly supervises EU CRAs registered with it under the CRA Regulation. The CRA Regulation provides that banks, investment firms, insurers, reinsurers, management companies, investment companies, AIFMs and CCPs may only use credit ratings for certain regulatory purposes if a rating is issued by: (i) an EU CRA registered with ESMA; (ii) a third-country CRA under the endorsement regime; or (iii) a third-country CRA under the equivalence/certification regime. Endorsement allows credit ratings issued by a third-country CRA to be used for regulatory purposes in the EU, provided that the rating has been endorsed by an EU CRA. The equivalence/certification regime allows credit ratings issued by a third-country CRA in relation to a third-country entity or financial instrument to be used in the EU for regulatory purposes. It does not cover ratings issued by a third-country CRA for an EU entity or a financial instrument issued in the EU.
The CRA Regulation will be brought into U.K. law under the European Union (Withdrawal) Act. HM Treasury is proposing to amend the CRA Regulation and existing U.K. legislation to ensure that U.K. CRAs can continue to operate and U.K. firms can continue to use credit ratings for regulatory purposes without interruption. The draft SI will transfer ESMA's powers and functions in relation to U.K. CRAs to the FCA from March 30, 2019 and grant additional powers and functions to the FCA so that it is able to effectively register and supervise CRAs.
The draft SI will establish a "conversion regime" under which CRAs that are already established in the U.K. will be able convert their registration with ESMA to an FCA registration. Third-country CRAs that are currently certified by ESMA will be able to extend their certification to the U.K. Each of these conversions will require a written notification to be given to the FCA.
A temporary registration regime will also be available for new legal entities established in the U.K. that are part of a group of CRAs with an existing ESMA registration on exit day. Firms that have submitted an application for registration to the FCA prior to exit day, and whose application is still to be determined, will enter the TPR. Other firms that wish to apply for registration as a U.K. CRA will need to submit an application to the FCA and will not be able to use the temporary registration regime.
HM Treasury will assume the European Commission's powers to make equivalence decisions. Existing equivalence decisions will be retained under the EU (Withdrawal) Act. The FCA will adopt existing ESMA decisions on the suitability of non-EU regulatory frameworks for CRAs.
Ratings issued by a U.K. CRA that is registered with the FCA, or by a third-country CRA under the endorsement or certification regime, will be permitted for regulated usage in the U.K. Where a rating has been issued before exit day in the EU by firms that register or apply for registration with the FCA, a transitional period of one year will allow firms to use credit ratings for regulatory purposes.
The explanatory guidance is available at: https://www.gov.uk/government/publications/draft-credit-rating-agencies-amendments-etc-eu-exit-regulations-2018/draft-credit-rating-agencies-amendments-etc-eu-exit-regulations-2018-explanatory-information.
