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Proposed "no-deal rules" for FCA firms

Proposed "no deal" rules

19th October - With the continuing risk of a “no-deal” Brexit, the Financial Conduct Authority (FCA) has published its first consultation paper (CP) (PDF 9.62MB) on proposed changes to the Handbook and EU-derived Binding Technical Standards (BTSs), and on its post-Brexit approach to EU non-legislative material, such as guidelines and Q&As issued by the European Supervisory Authorities (ESAs).

The FCA’s aim is to ensure the Handbook and BTSs continue to function in the event of a 'no-deal' Brexit. The FCA stresses that it does not propose wider policy changes, nor changes unrelated to Brexit. For the most part, the amendments proposed are straightforward changes to update technical regulatory references and concepts.

The FCA seeks comments by 7 December, with feedback and final rules scheduled for Q1 2019 so they can be in force for exit day. The FCA is concurrently consulting on the detail and compliance requirements for inbound firms and funds wishing to benefit from the Temporary Permissions Regime.

The overall approach

Consistent with HM Treasury’s legislative proposals, the FCA’s 'baseline approach' is to treat all EU Member States as third countries after exit day. However, where necessary to ensure a 'sound, functional regulatory regime' and to avoid significant disruption to firms, investors and/or consumers, some limited modifications will be made. For instance, the FCA is considering temporary transitional arrangements in relation to certain prudential requirements for solo-regulated firms in respect of EU originated exposures.

To address ‘cross-cutting issues’ – those that span the Handbook and BTSs – the FCA proposes amendments that refer only to new or revised UK legislation, rather than EU equivalents, retaining EU law references to help firms understand how the Handbook or BTSs implemented EU law in the past. References to EU institutions have been replaced, for the most part, by equivalent UK institutions.

The FCA also highlights certain Handbook Sourcebooks and BTSs where it either details its rationale for following the baseline approach or explains why it has chosen to deviate from it. Specifically, the FCA focusses on prudential standards (for solo regulated firms), business conduct, funds, credit ratings, EMIR, MiFID II and short selling related changes.

The vast library of ESA Q&As, recommendations, opinions and guidelines will not be incorporated into UK law. The FCA proposes, instead, to issue non-Handbook guidance on the approach it will take after exit day.

The FCA seeks stakeholder feedback on whether the proposed approach would inadvertently introduce wider policy changes or pose a significant risk to industry compliance. In particular, the FCA seeks views and supporting data on:

  • The challenges associated with implementing the proposed Statutory Instrument or Handbook changes;
  • The challenges resulting from compliance with new requirements, or from continuing compliance;
  • Any new systems that may need to be built, including the expected time needed to build these; and
  • External dependencies that may affect firms’ exit day compliance.

What does it mean for firms?

Firms will need to determine the impact of any revised provisions and supervisory changes, and consider how to reflect these in their current governance arrangements, policies and procedures. Firms will need to pay particular attention to the inter-relations and interdependencies between the various amendments, and any re-papering requirements, which may necessitate communications with consumers/investors, counterparties and suppliers.

Firms should continue to comply with the ESAs’ Level 3 guidance, until such time as the FCA informs otherwise.

It is important that firms help the FCA to identify challenges, inconsistencies and omissions, which may need to be addressed by other rule changes, modifications, waivers, etc.

Under its temporary transitional power, the FCA is willing to waive or modify some requirements to allow for a smooth transition, meaning that the FCA or PRA do not expect firms and others subject to these proposals to prepare now to implement any major new requirements.

Next steps

The PRA will also be issuing its consultation paper shortly, which will be relevant for all dual-regulated firms. In addition, the FCA will publish a second consultation paper later this year covering further BTSs and parts of the Handbook affected by statutory instruments yet to be published. It will also cover cross-cutting issues (single issues that affect multiple parts of the Handbook), as well as any further amendments arising from amendments to the PRA’s Rulebook, and the FCA’s existing waiver and modification powers in relation to rules transposing EU directives.

The FCA may also revisit material consulted on in the CP as a result of further changes being made to the Handbook, for example, as a result of the implementation of the Senior Managers and Certification Regime (SMCR) or the publishing of further Brexit-related rules.

If the UK and the EU agree on the terms of the withdrawal agreement, including the proposed implementation period, then the amendments consulted on in the CP will not come into effect on 29 March 2019, and will instead be subject to the outcome of the negotiations on the future relationship between the UK and EU.

 

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