Bank of England and UK Prudential Regulator Consult on Approach to Onshoring EU Financial Services Legislation for Brexit
10/25/2018The Bank of England and the U.K. Prudential Regulation Authority have launched a joint consultation paper entitled "The Bank of England’s approach to amending financial services legislation under the European Union (Withdrawal) Act 2018." 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 covers:
- How the BoE and the PRA propose to use their delegated power, under the Financial Regulators' Powers (Technical Standards) (Amendment etc.) (EU Exit) Regulations 2018, to address deficiencies in the PRA Rulebook and to make any necessary amendments to the Binding Technical Standards which comprise "level 2" of the EU financial services legislation that will be onshored.
- How the BoE and PRA propose to use the new "temporary transitional power" to grant temporary transitional relief where requirements have been introduced or have changed as a result of onshoring. HM Treasury proposes to legislate to grant the regulators this power, for use in the event of a "no deal" scenario, and set out further details of its approach on October 8, 2018.
- How the BoE and PRA propose to treat the existing body "level 3" Guidelines and Recommendations on Brexit.
This consultation on the BoE's and PRA's general approach provides background for, and should be read in conjunction with, the other consultation papers that form part of the package of consultations and communications on Brexit preparations. 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;
- U.K. FMIs regulated by the BoE; and
- non-U.K. CCPs and non-U.K. Central Securities Depositories providing cross-border services into the U.K.
Some notable elements of the consultation are highlighted below.
Temporary transitional power
The temporary transitional power to be introduced by HM Treasury will be available to be used by regulators in respect of any onshoring changes that affect firms' and FMIs' obligations. Relief will be able to be granted for up to two years after exit day. In the consultation paper, the BoE and PRA confirm that they propose to use the power broadly and provide the following five examples demonstrating how they intend to use the power to delay the application of onshoring changes that would otherwise require firms and FMIs to take action before exit day to comply with the changes:
- Firms and FMIs that are subject to U.K. laws would be able to continue to treat EU27 exposures and assets preferentially for the purposes of capital requirements, liquidity and large exposures regimes.
- Reporting and disclosure of regulatory data would be on the same basis as before exit day.
- U.K. groups that are part of EEA-headquartered banking groups would not need to comply with consolidated liquidity requirements at U.K. level.
- Where Brexit results in new U.K. sub-groups, if HM Treasury relieves the PRA of its obligation to exercise group supervision at the level of the U.K. sub-group, then EEA-headquartered insurance groups would not need to calculate or report consolidated capital requirements at the U.K. sub-group level.
- Credit unions would be able to continue to place deposits with EEA credit institutions.
The PRA has so far identified three areas where it would not propose to exercise the temporary transitional power, on the basis that to do so may undermine its statutory objectives. The areas are: (i) contractual recognition of bail-in rules; (ii) contractual agreement to resolution stays on termination provisions; and (iii) Financial Services Compensation Scheme protection.
Treatment of Level 3 materials
The BoE and the PRA have prepared a draft Statement of Policy on future compliance with the body of "Level 3" Guidelines and Recommendations that have been prepared by the European Supervisory Authorities. The draft Statement of Policy includes a non-exhaustive list of Guidelines that are currently complied with in the U.K. The BoE and PRA do not propose to reproduce or amend the content of existing Guidelines and Recommendations before exit day. The BoE and PRA expect firms and FMIs to continue to comply after exit day with Guidelines that are currently complied with and should interpret them in light of Brexit, onshoring changes and any transitional relief.
If new Guidelines and Recommendations are made by EU authorities, or changes are made to existing material, these will not automatically apply on Brexit. The BoE and PRA will consider their approach and may issue further statements in such cases.
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.
View the joint BoE/PRA consultation paper (CP 25/18).
View details of the package of communications published on October 25, 2018.
View details of HM Treasury's approach to introducing a temporary transitional power for regulators.
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