European Union: UK Prudential Regulator Consults On Rule Changes And Onshoring Of Binding Technical Standards For Brexit

On October 25, 2018, the U.K. PRA published a consultation paper entitled "UK withdrawal from the EU: Changes to PRA Rulebook and onshored Binding Technical Standards." The consultation forms part of a package of consultations, "Dear CEO" letters and other communications published by the BoE and the PRA on October 25, 2018.

The consultation paper sets out a suite of proposed amendments by the PRA to ensure an operable legal and regulatory framework after the U.K. leaves the EU. It includes:

  • the PRA's proposals to fix deficiencies arising from the U.K.'s withdrawal from the EU in the PRA Rulebook;
  • the PRA's proposals to fix deficiencies in the Binding Technical Standards within the PRA's remit that will be converted, or "onshored," into U.K. law.
  • the PRA's proposals on how existing non-binding PRA materials, including Supervisory Statements, Statements of Policy and the PRA Approach Documents should be read by firms after Brexit.

The PRA's proposals are based on the onshoring legislation either published in draft by HM Treasury or laid before Parliament as at the date of publication of the consultation. The PRA will propose further changes to the PRA Rulebook and onshored BTS when further onshoring legislation is published.

The proposals in the consultation paper are relevant to:

  • all firms authorized and regulated by the PRA;
  • EEA firms undertaking cross-border activities into the U.K. from the rest of the EU that are expected to have deemed permission under the temporary permissions regime; and
  • Firms (including EEA firms) that are expected to apply for PRA authorization in the future.

Some notable elements of the consultation are highlighted below.

PRA Rule changes

The majority of proposed changes to PRA rules relevant to banks, building societies and designated investment firms arise as a result of changes that will be made under the onshoring legislation that is either in draft form or that has been laid before Parliament to amend deficiencies in the Capital Requirements Regulation and the Bank Recovery and Resolution Directive. Some firms will also be affected by onshoring legislation (and consequent PRA rule changes) for the European Market Infrastructure Regulation or the Central Securities Depositories Regulation. Recently-published HM Treasury policy notes on ring-fencing and on the Financial Conglomerates Directive will also be relevant.

Most of these changes follow the general approach set out in the separately published BoE/PRA consultation paper on onshoring EU legislation, which assumes a baseline approach that EEA states would be treated as "third country" states by the U.K. and the EU would also treat the U.K. as a "third country." The consultation paper highlights some exceptions to this baseline approach:

  • Contractual Recognition of Bail-In: PRA-regulated banks and some large investment firms are required to agree with their counterparties that such counterparties would recognize bail-in under the BRRD, where the governing law is not an EU governing law. After Brexit, this requirement will apply to non-U.K. law-governed agreements of in-scope firms. To avoid the potential costs for firms of renegotiating existing EEA law-governed liabilities to include terms for the contractual recognition of bail-in term, unless they are materially amended after exit day, the PRA proposes to amend Rule 2.1 of the Contractual Recognition of Bail-In Part of the PRA Rulebook, so that the requirement does not apply in respect of EEA law-governed liabilities that were created before exit day. As a result, bail-in clauses for EEA (non-U.K.) law-governed agreements will only need inserting for new agreements or amendments to existing agreements.
  • Stay in Resolution: Similar rules require counterparties to in-scope firms to agree contractually to stays on termination rights applicable in a resolution. Currently, such clauses are mandatory in non-EU law-governed agreements. In-scope firms will need in future to include such clauses in non-U.K. law-governed agreements. The PRA proposes not to amend its existing Stay in Resolution rules, meaning that the existing stock of financial arrangements governed by EEA law as at exit day would not need to be updated. Firms would be required to comply to agree such provisions in respect of new EEA (non-U.K.) law-governed contracts that are entered into or amended after exit day.
  • Use of temporary transitional power: The PRA confirms that it does not propose to use its temporary transitional power to provide transitional relief for regulatory obligations that relate either to contractual recognition of bail-in or to stay in resolution.

Temporary Permissions Regime

The PRA has confirmed that EEA firms operating in the U.K. under a single market passport that enter the TPR will be treated as third country firms. The PRA expects that firms in the TPR with a branch in the U.K. will comply with the same rules that apply to other third country firms' U.K. branches. For cross-border service providers in the TPR with no U.K. branch, a more limited set of rules will apply.

The PRA proposes to apply the Senior Managers and Certification Regime rules for U.K. branches of third country firms (third country branches) to firms in the TPR including, with appropriate modifications, to cross- border service providers without a U.K. branch.

Binding Technical Standards

The PRA is consulting on changes to onshored BTS that will be the responsibility of the PRA under the draft Financial Regulators' Powers (Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018. These Regulations give the PRA and the Financial Conduct Authority the option either to retain BTS for which they are jointly responsible as "joint," or to "divide" them, resulting in a PRA version of the onshored BTS for PRA- regulated firms and an FCA version for FCA-regulated firms. The FCA and PRA have opted to "divide" all joint BTS, with the exception of one BTS under the European Market Infrastructure Regulation. Where BTS have been "divided," to avoid duplicative consultations, one regulator will consult on those BTS and each regulator will then make an identical set of amendments to their part of the relevant BTS.

The consultation sets out the proposed changes to the joint PRA/FCA BTS under the Bank Recovery and Resolution Directive, the Capital Requirements Directive, the Capital Requirements Regulation and the Financial Conglomerates Directive. The FCA has consulted separately on the joint PRA/FCA BTS under the Markets in Financial Instruments package. The FCA consultation closes on December 7, 2018. PRA-regulated firms can feed back to the PRA on the MiFID II BTS proposals if they wish.

The consultation also sets out in an appendix a full list of the joint BTS for which responsibilities among regulators have been divided, the BTS for which the PRA has responsibility, along with draft "EU Exit Instruments" to effect the changes to those BTS. Some existing BTS will be deleted on Brexit, for example if they relate solely to relationships between EU bodies and cease to be relevant for U.K. purposes after Brexit.

Depositor and Dormant Account Protection

The consultation includes a draft update to the PRA's Supervisory Statement 18/15, "Depositor and dormant account protection."

Non-Binding PRA Materials

Except for proposed changes to its Supervisory Statement, "Depositor and dormant account protection," the PRA does not propose to make line-by-line amendments to its non-binding materials at this stage to reflect the U.K.'s withdrawal from the EU.

The consultation includes a draft Supervisory Statement, "Non-binding PRA materials: the Prudential Regulation Authority's approach after exit from the EU," setting out how firms should interpret existing non- binding PRA regulatory and supervisory materials after Brexit. This covers all PRA Approach Documents, all Supervisory Statements and Statements of Policy and all other guidance in force at exit day, including any legacy Financial Services Authority guidance that was adopted by the PRA. The draft Supervisory Statement includes a non-exhaustive list of various key changes being made to onshored legislation that firms should consider when interpreting existing PRA non-binding materials.

Reporting and Disclosure Requirements

The consultation includes a draft Supervisory Statement, entitled "PRA approach to interpreting reporting and disclosure requirements after the U.K.'s withdrawal from the EU," which sets out how the PRA expects firms to interpret EU references in reporting and disclosure requirements after exit day.

The PRA has not made line-by-line changes to reporting or disclosure requirements as a result of Brexit. The Supervisory Statement sets out a general approach to the interpretation of EU references, along with further specific requirements relating to the reporting and disclosure requirements under the Capital Requirements Regulation, Solvency II and certain specific EU-based references in reporting and disclosure requirements set out in PRA rules.

Comments on the consultation are invited by January 2, 2019. The proposed changes will only take effect on exit day in a "no-deal" scenario, in which the U.K. exits the EU on March 29, 2019 without a transitional period agreed between the U.K. and the EU as part of a Withdrawal Agreement. If there is a transitional period, it is expected that the changes would take effect at the end of that period.

The PRA's consultation paper and related appendices are available at: https://www.bankofengland.co.uk/prudential-regulation/publication/2018/uk-withdrawal-from-the-eu-changes-to-pra-rulebook-and-onshored-bts.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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