On June 27, 2018, following the enactment of the European Union (Withdrawal) Act 2018, HM Treasury set out its approach to "onshoring" EU financial services legislation under the Act. The Bank of England, the Financial Conduct Authority and the Payment Systems Regulator have each also issued statements on their respective roles in preparing for the U.K.'s withdrawal from the EU.
The U.K. and the EU have, in principle, agreed the terms of a transitional, or implementation, period to run from March 29, 2019 (the date of the U.K. exit) to December 31, 2020. During that implementation period, the U.K. would remain a member of the EU's single market in financial services. Passporting and other relevant EU frameworks would remain available, allowing U.K. and EU firms, funds and trading venues to continue to provide services cross-border or via branches, U.K. financial market infrastructures, such as CCPs, to continue to provide services in the EEA and EEA and third-country financial market infrastructures to continue to provide services in the U.K.
The European Union (Withdrawal) Act 2018 converts EU law as it stands at the moment of exit into domestic law before the U.K. leaves the EU (this is referred to as onshoring). The EUWA also empowers ministers to make statutory instruments to prevent, remedy or mitigate any failure of EU law to operate effectively or any other "deficiency" in retained EU law. The statutory instruments will not themselves make any policy changes and the power to create them will fall away two years after exit day. HM Treasury has conducted a thorough review to identify deficiencies that will require statutory instruments to be laid under the EUWA. Examples of deficiencies include provisions in retained EU law that would become redundant, such as references to the relationship between EU and member state supervisory bodies, and provisions that refer to functions carried out by EU authorities that would no longer apply on the U.K.'s exit.
HM Treasury intends to sub-delegate powers to the relevant U.K. regulators to address deficiencies in the U.K. regulatory rulebooks and to task the regulators with making any necessary amendments to, and subsequently maintaining, the Regulatory Technical Standards and ITS which comprise "level 2" of the EU legislation that will be onshored. These RTS and ITS sit under the "level 1" EU legislation and do not set any policy direction. Instead they provide technical detail on how the level 1 requirements must be met. HM Treasury issued draft legislation on the sub-delegation of powers in April 2018, the Financial Regulators' Powers (Technical Standards) (Amendment etc.)(EU Exit) Regulations 2018. Among other things, this draft legislation provides for HM Treasury approval to be obtained for changes to RTS/ITS and for the regulators to produce an annual report to HM Treasury showing how they have exercised their sub-delegated powers under EUWA.
On Brexit, U.K. bodies will also need to take over functions that are carried out by EU bodies. HM Treasury is allocating those functions as part of its onshoring work. HM Treasury intends that the FCA will be empowered to regulate credit rating agencies and trade repositories, a function currently carried out by the European Securities and markets Authority. The BoE will take over ESMA's current functions and powers in relation to non-U.K. CCPs and non-U.K. CSDs. A division of powers between U.K. regulators has already been proposed in the Financial Regulators' Powers (Technical Standards) (Amendment etc.) (EU Exit) Regulations 2018 and accompanying explanatory note.
The statement issued by HM Treasury states that firms should continue to plan for Brexit on the assumption that an implementation period will be in place from March 29, 2019. However, given that the agreed terms of the implementation period will not be binding unless and until there is finalization of a Withdrawal Agreement between the EU and the U.K., HM Treasury must also plan for a "no deal" scenario, whereby the U.K. becomes a third country on exit day. HM Treasury's approach to drafting the necessary onshoring legislation is to ensure continuity and certainty, and to protect financial stability, by readying the U.K. framework for a no deal scenario, with legislation that can take effect either on exit day or at a later date if the U.K. enters the implementation period. The U.K. will also introduce a Temporary Permissions Regime. Announced in December 2017, the proposed TPR will allow EEA firms that would lose their passporting rights on a "no deal" Brexit to continue to operate in the U.K. for a time-limited period, which would provide them with time to seek U.K. authorization for their activities.
HM Treasury and the regulators have outlined their plans for consultation as follows:
- Over the summer 2018, HM Treasury will issue a number of statutory instruments. These statutory instruments will relate to the TPR, the TPR for CCPs and to the sub-delegated powers for the regulators on the RTS/ITS and rulebook amendments. The first set of draft statutory instruments to correct deficiencies in retained EU law will also be published, dealing with prudential regulation and capital markets issues.
- In autumn 2018, the FCA will issue a consultation paper on how it plans to amend its Handbook and the RTS/ITS for which it has responsibility. The BoE also expects to consult in autumn on the RTS/ITS for which it has responsibility. The PSR is the main U.K. regulator under the Interchange Fees Regulation ((EU) 2015/751) and is also expected to consult on RTS/ITS under that regulation.
- From autumn 2018 and into early 2019, HM treasury will issue further groups of statutory instruments to correct deficiencies in retained EU law. The FCA will also consult on rules that will apply to EEA firms in the TPR and will publish information for EU entities that currently access or do business in the U.K. without using passporting rights.
HM Treasury's Statement is available at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/720298/ HM_Treasury_s_approach_to_financial_services_legislation_under_the_European_Union Withdrawal Act. pdf, the Bank of England Press Release is available at: https://www.bankofengland.co.uk/-/media/boe/files/news/2018/june/boes-approach-to-financial-services-legislation-under-the-eu-withdrawal-act.pdf, the FCA statement is available at: https://www.fca.org.uk/news/statements/fca-role-preparing-for-brexit, the PSR's Statement is available at: https://www.psr.org.uk/psr-publications/news-announcements/PSR-approach-financial-services-legislation-under-EU-withdrawal-act, the draft Financial Regulators' Powers (Technical Standards)(Amendment etc.) (EU Exit) Regulations 2018 are available at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/701834/draft _Financial_Regulators Powers Technical_Standards Regulations.pdf and the HM Treasury's December 2017 announcement is available at: https://www.parliament.uk/business/publications/written-questions-answers-statements/written-statement/Commons/2017-12-20/HCWS382/, the U.K. Regulators' announcements on their approaches are available at: https://finreg.shearman.com/uk-government-and-regulators-set-out-approach-to-.
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