Draft UK Legislation to Onshore the EU Reorganization and Winding Up Directives Published in Preparation for Brexit
11/30/2018HM Treasury has published a draft statutory instrument to onshore further EU financial services legislation in preparation for Brexit - the draft Credit Institutions and Insurance Undertakings Reorganization and Winding Up (Amendment) (EU Exit) Regulations 2018. An explanatory memorandum has also been published. HM Treasury has prepared the draft SI using powers granted to it under the EU Withdrawal Act 2018 to address failures of retained EU law to operate effectively or other deficiencies arising from the U.K. leaving the EU.
The draft SI will onshore the EU Credit Institutions (Reorganisation and Winding Up) Directive and certain aspects of Solvency II. These Directives establish EEA frameworks for the reorganization and winding up of EEA banks, building societies, credit unions and insurers. They were transposed into U.K. law in the Insurers (Reorganization and Winding Up) Regulations 2004 (S.I. 2004/353), the Credit Institutions (Reorganization and Winding Up) Regulations 2004 (S.I. 2004/1045), and the Insurers (Reorganization and Winding Up) (Lloyd's) Regulations 2005 (S.I. 2005/1998).
The draft SI amends the U.K. implementing legislation so that the EEA will be treated in the same way as other third countries under U.K. laws. Among other things, the draft SI will:
- Remove the prohibitions on U.K. courts from making winding-up or administration orders against EEA banks, building societies, credit unions, insurers, investment firms and group companies. After exit day, U.K. courts will be able to make orders in respect of an insolvent EEA firm, subject to the U.K. jurisdictional and insolvency tests being met.
- Remove the automatic recognition of EEA insolvency measures by the U.K.
- Remove the provisions giving preferential treatment for EEA countries by providing that certain contracts or rights within a reorganization or winding-up fall under the law of an EEA Member State. No change is being made to the provisions that allow for any applicable law to apply, whether it is English law or the law of an EEA member state or that of a third country. Examples of the applicable law provisions are the creditors' right to set off, regulated market transactions, repurchase and netting agreements.
In addition, HM Treasury has included transitional and savings provisions to provide certainty for market participants. Firstly, for insolvency proceedings that commence before March 29, 2019, the current law will apply to that insolvency. This means that U.K. insolvency proceedings could not be commenced and that the U.K. would have to automatically recognize the EEA insolvency proceedings. The provision would be subject to a U.K. court determining that one of three conditions has not been met: (i) an ongoing EEA measure or proceeding will have an adverse effect on the U.K.'s financial stability; (ii) U.K. creditors could be materially prejudiced in comparison to EEA creditors; or (iii) continuation of the proceedings would be unlawful under the Human Rights Act 1998. Furthermore, the draft SI provides that an EU insolvency officer cannot, in an ongoing EEA-led bank, building society or credit union insolvency, take action in the U.K. that is inconsistent with the U.K. settlement finality and financial collateral framework. These safeguarding provisions will not apply to resolution actions, under the EU Bank Recovery and Resolution Directive and related onshored U.K. legislation, which are ongoing at the time of the U.K.'s exit from the EU.
View the draft Credit Institutions and Insurance Undertakings Reorganization and Winding Up (Amendment) (EU Exit) Regulations 2018 and explanatory information.
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