10th October - As part of its measures to ensure the continuity of financial services legislation post-Brexit, the Treasury is proposing to introduce a temporary transitional power to be exercised by the Bank of England, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). This would enable these regulators to waive or modify (for a limited period) firms’ regulatory obligations that have changed as a result of the ‘onshoring’ of the post-Brexit financial services legislation, in the event of a ‘no deal’ Brexit on 29 March 2019.
Implications for firms
The temporary transitional power should benefit firms by allowing them to adjust in an orderly manner to the ‘onshoring’ of post-Brexit financial services legislation in the event of a ‘no-deal’ Brexit. It is a continuation of the Treasury’s measures to preserve continuity and financial stability, and to offer an orderly transition to both EU27 inbound firms and to UK-based firms.
Firms and their trade bodies should be seeking to identify any areas where this transitional relief might be beneficial, and discussing this with their regulators as soon as possible. Firms will need some certainty ahead of 29 March 2019 on which waivers and rule modifications are likely to be granted by the regulators.
However, there is a limit to how much can be achieved by the UK alone – there remain some issues where reciprocal action would also be necessary from the EU, as for example with the concerns over contract certainty in the derivatives market on which ISDA has just issued a paper.
The proposed temporary transition power could be applied to post-Brexit changes to onshored EU Regulations, UK legislation derived from EU Directives, and regulators’ own rules. The power could be used to grant transitional relief in respect of any regulatory requirements that would otherwise apply for the first time on exit day to a particular category of firm.
Transitional relief could be granted to particular firms, classes of firms, or all firms to which a particular onshoring rule change applies, including inward passporting firms covered by the Temporary Permissions Regime. Firms would not need to apply for transitional relief in order to benefit from it - the regulators will issue ‘directions’ that set out the transitional relief. These directions would normally be published on the regulators’ websites, except where this was inappropriate or unnecessary.
Transitional relief could be granted where, in the judgment of the regulators, such relief would be appropriate to enable firms to adjust to the post-Brexit regulatory framework in an orderly way, for example by giving firms time to comply with an onshoring change, rather than requiring them to implement the relevant onshoring changes by 29 March 2019. The power could be used only to facilitate firms in adjusting to the UK’s post-Brexit regulatory regime. It could not be used to waive or modify a firm’s pre-exit obligations where they remain unaltered, and could not be used if doing so would undermine the regulators’ statutory objectives.
The power to make transitional provision would be available to the regulators for 2 years from Brexit, and any transitional provisions made using the power would cease to have effect after 2 years from Brexit.
The PRA and the FCA already have powers to grant waivers and to modify rules under the Financial Services and Markets Act 2000 (FSMA). The proposed temporary permission power would adapt and extend this concept for a ‘no-deal’ Brexit by providing UK regulators with a power that could be applied beyond the regulators’ own rules and would not require the FSMA criteria to be met.
HM Treasury set out its approach to post-Brexit financial services legislation in June 2018, under the European Union (Withdrawal) Act 2018 (PDF 211KB) (the “Act”).
The Act gives the Treasury powers to ensure that the UK has a fully functioning financial services regulatory regime in any scenario, including in the event of a ‘no deal’ Brexit on 29 March 2019. This has already been used to provide for a Temporary Permissions Regime and a Temporary Recognition Regime to enable firms and funds currently passporting into the UK and relevant non-UK Central Counterparties to continue their activities in the UK for a limited time after Brexit.
The Treasury has also begun to draft Statutory Instruments to amend EU Regulations and UK legislation that implements related EU Directives so that a full financial services regulatory regime would be in place if necessary at 29 March 2019. This would be achieved by replacing references to “the EU” or “member states” with “the UK”; transferring functions from EU institutions to UK authorities; transferring the responsibility for taking third country equivalence decisions from the Commission to the Treasury; and continuing to apply any decisions already taken under EU legislation as if they had been taken by the UK authorities. See our alert on Preparing for regulation after Brexit.