The following posts provide a snapshot of the principal U.S., European and global financial regulatory developments of interest to banks, investment firms, broker-dealers, market infrastructures, asset managers and corporates.
UK Regulator Publishes Application Requirements for EEA Market Operators Seeking Recognition
The Financial Conduct Authority has published a direction on how EEA market operators can apply for recognition as an overseas investment exchange in preparation for Brexit. EEA market operators operating a regulated market, a multilateral trading facility or an organised trading facility currently use passports granted under the revised Markets in Financial Instruments Directive to give their U.K.-based members access to their markets. Once the U.K. has left the EU, those passports will no longer be valid and the U.K. Government does not intend to establish a temporary permissions regime in the event of a "no deal" outcome to the EU-U.K. Brexit negotiations or without an agreed implementation period. EEA market operators that engage in regulated activities when providing their U.K. members with access to their markets will need to apply for ROIE status, unless they can rely on the U.K.'s overseas persons exclusion. The FCA's direction sets out the FCA's expectations for EEA market operators.
View the FCA's statement.
View the FCA's Direction.
Post-Brexit UK Secondary Legislation Published For Temporary Permissions Regime For Payments Services
HM Treasury has published draft statutory instruments on the regulation of payments and e-money and on access to the Single Euro Payments Area in preparation for the U.K.'s withdrawal from the EU - the draft Electronic Money, Payment Services and Payment Systems (Amendment and Transitional Provisions) (EU Exit) Regulations 2018 and the Credit Transfers and Direct Debits in Euro (Amendment) (EU Exit) Regulations 2018. The draft Regulations are relevant to all Payment Service Providers and registered Account Information Service Providers. The draft Regulations will amend the Payment Services Regulations 2017, Electronic Money Regulations 2011 and the SEPA Regulation to:
- Create a temporary permissions regime for EEA payment firms
UK Government Issues Brexit "No-Deal" Guidance for Financial Services
HM Treasury has published a technical notice entitled "Banking, insurance and other financial services if there's no Brexit deal," to provide guidance about the impact of the U.K. leaving the EU without a ratified withdrawal agreement in place. The guidance is relevant to financial services firms, funds and financial market infrastructures and to their customers. The technical notice is one of the first 25 of a series of U.K. government technical notices setting out information that will enable businesses and citizens to make informed plans and preparations in the event of the U.K. exiting the EU on March 29, 2019 without a deal. These technical notices include a notice on the government's overarching approach to preparing for a "no deal" scenario.
UK Releases Draft Legislation to Onshore EU Regulatory Capital Requirements Legislation Post-Brexit
HM Treasury has released another draft statutory instrument in preparation for Brexit, the Capital Requirements (Amendment) (EU Exit) Regulations 2018 - the draft Capital Requirements Regulations. The EU regulatory capital requirements framework for banks, building societies and investment firms comprises the Capital Requirements Regulation, the Capital Requirements Directive and secondary legislation in the form of technical standards. The CRD is implemented into U.K. law through various sector-specific legislation, for example, the Regulated Covered Bonds Regulations 2008, the Capital Requirements Regulations 2013, the Capital Requirements (Country-by-Country Reporting) Regulations 2013, and the Capital Requirements (Capital Buffers and Macro-prudential Measures) Regulations 2014 as well as through PRA and FCA rules. The CRR and the technical standards are directly applicable across the EU.
This draft Capital Requirements Regulations will amend the CRR to ensure that it continues to operate effectively in the U.K. when the U.K. leaves the EU. The domestic legislation implementing CRD is also amended to ensure that it continues to function as intended. The Prudential Regulation Authority and the Financial Conduct Authority will be responsible for amendments to the technical standards and for updating their rulebooks. They are expected to consult in Autumn 2018 on these aspects.
UK Government Releases Post-Brexit Draft Legislation for Deposit Protection
HM Treasury has published draft Deposit Guarantee Scheme and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018. The draft regulations are expected to be laid before Parliament in autumn 2018 and to come into force mostly on the day the U.K. withdraws from the EU. These draft regulations are part of HM Treasury's measures to onshore EU legislation under the provisions of the European Union (Withdrawal) Act 2018. The key changes proposed are:
- transferring the power to review, adjust and set the coverage level from EU bodies to the Prudential Regulation Authority, with approval from HMT; and
- removing the cooperation arrangement under which the U.K. Financial Services Compensation Scheme administers compensation payments to depositors at U.K. branches of EEA banks on behalf of EEA deposit guarantee schemes. A transitional provision will allow the FSCS to continue after Brexit to accept instructions and funds from EEA DGS should an EEA firm operating in the U.K. fail immediately before Exit Day.
View the draft Regulations.
View the explanatory guidance.
UK Post-Brexit Secondary Legislation on Short Selling Published
Draft U.K. secondary legislation has been published to onshore the EU Short Selling Regulation on the day the U.K. exits the EU. The draft Short Selling (Amendment) (EU Exit) Regulations 2018 (or U.K. SSRs) are expected to be laid before Parliament in Autumn 2018 and to come into force mostly on the day the U.K. withdraws from the EU. The draft U.K. SSRs are made under the provisions of the European Union (Withdrawal) Act 2018 to address failures of retained EU law relating to short selling to operate effectively and other deficiencies arising from Brexit.
The explanatory guide to the U.K. SSRs states that changes for firms with shares admitted to trading on a U.K. venue should be minimal. The procedure for notifying U.K. instruments to the Financial Conduct Authority will be kept and instruments admitted to trading on U.K. venues will continue to have the same restrictions applied to them.
UK Financial Conduct Authority Confirms it is Open to a Range of Booking Models for Brexit Preparations
The U.K. Financial Conduct Authority has published a "Dear CEO" letter on firms' cross-border booking models in preparation for Brexit. In the letter the FCA reminds firms that where the firm is expanding its European presence, it must still be possible for the FCA to supervise the firm's U.K. business and firms must still meet their threshold conditions. However, unlike other EU regulators, the FCA is not stipulating specific requirements for booking models. Instead, the FCA states that it is "open to a broad range of legal entity structures or booking models. This includes those making use of back-to-back and remote booking, providing their associated conduct risks are effectively controlled and managed. Our starting point is therefore not to restrict business models but to understand the principles and practice involved and how the conduct risks that arise from them are managed."
UK White Paper Published on How the Withdrawal Agreement Will Be Implemented in the UK
The U.K.'s Department for Exiting the EU has published a further Brexit white paper, entitled: "Legislating for the Withdrawal Agreement between the United Kingdom and the European Union." The paper describes the Bill that will implement the terms of the Withdrawal Agreement in the U.K. The Bill, which must pass before exit day (March 29, 2019) will only be introduced once Parliament has approved the finalized Withdrawal Agreement as required under the EU (Withdrawal) Act 2018. In the paper, the Government sets out how it envisages the Bill will implement the U.K.'s withdrawal and provides detail on those parts of the draft Withdrawal Agreement that have been agreed so far: citizens' rights, the implementation period and the negotiated financial settlement. The final provisions of the Bill will be subject to the final terms of the Withdrawal Agreement. The paper also sets out the procedures for Parliament's approval of the terms of the final Withdrawal Agreement.
UK Legislation Published for a Post-Brexit Recognition Regime for CCPs
A draft of the Central Counterparties (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018 has been laid before Parliament. The finalized Regulations will come into force partly on the day after the day they are made and fully on the day the U.K. withdraws from the EU.
The draft Regulations have been prepared using the power under the European Union (Withdrawal) Act 2018 to address failures of retained EU law to operate effectively or other deficiencies arising from the withdrawal of the U.K. from the EU. These draft Regulations deal with "onshoring" certain aspects of the European Market Infrastructure Regulation that relate to the regulatory framework for CCPs. The Bank of England wrote to non-U.K. CCPs in December 2017, outlining how it envisaged that non-U.K. CCPs will be recognized to provide services in the U.K. once the U.K. has withdrawn from the EU. Recognized status under EMIR enables third-country CCPs to provide clearing services to clearing members or trading venues established in the EU. The BoE explained in its letter that U.K. domestic law requirements for the recognition of non-U.K. CCPs would be substantially the same as the current requirements under EMIR, although references to international MoUs being in place would change, such that these must be established between third countries and relevant U.K. authorities.
UK Secondary Legislation Published for Post-Brexit Temporary Permissions Regime
A draft of one of several pieces of U.K. legislation has been published, that will establish a temporary permissions regime after the U.K.'s withdrawal from the EU. Temporary permission will be available for EEA firms currently operating in the U.K. under financial services passports. The draft EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018 are expected to be laid before Parliament in Autumn 2018 and to come into force mainly on the day after they are made, apart from some provisions that will apply on the day the U.K. withdraws from the EU. The draft Regulations also amend the Financial Services and Markets Act 2000 and related legislation to remove references to EEA passport rights.
The draft Regulations have been prepared under the provisions of the EU (Withdrawal) Act 2018, which sets out an enhanced scrutiny procedure for secondary legislation used to amend certain retained EU law. This means that the draft Regulations will require the approval of both Houses of Parliament before they are made.
UK Plans Temporary Designation Regime for Settlement Finality Designation Post-Brexit
The U.K. Government has announced that it intends to legislate to ensure, after U.K. withdrawal from the EU, the continuation of U.K. settlement finality protections currently provided under the Settlement Finality Directive and implemented in the U.K. by the Financial Markets and Insolvency (Settlement Finality) Regulations 1999. The SFRs establish various insolvency carve-outs for designated market infrastructure systems and also legislate for finality of transactions within such systems. However, only EU systems are in scope.
The SFD requires Member States to notify the European Securities and Markets Authority with information concerning the national systems (and the respective system operators) they have designated to be included within the scope of the SFD protections. Member States must also designate the national authorities that must be notified when insolvency proceedings are opened against a participant or a system operator. Under the protections afforded by the SFD, transfer orders which enter into designated systems within certain deadlines are guaranteed to be finally settled, regardless of whether the sending participant has become insolvent or transfer orders have been revoked in the meantime. Under the SFD, each Member State automatically recognizes systems that have been designated by other Member States.
European Commission Presses for Step Up in Brexit Preparations
The European Commission has published a Communication on preparing for the withdrawal of the U.K. from the EU on March 30, 2019. Alongside the Communication, a factsheet has been published entitled, "Seven Things Businesses in the EU27 Need to Know in Order to Prepare for Brexit." In the Communication, the Commission warns all stakeholders that "[p]reparation must therefore be stepped up immediately at all levels and taking into account all possible outcomes." The Commission highlights that it is not yet certain that an agreement will be in place by exit day (March 30, 2019) and that a cliff-edge scenario could still occur. Without ratification of the Withdrawal Agreement, there will be no transitional period providing a further 21 months to prepare for when EU law ceases to apply to and in the U.K. and the Commission is urging all stakeholders to prepare for all scenarios.
In the Communication, the Commission counsels the financial services sector (see page 14) to prepare for a "hard Brexit." The Commission advises that ensuring that there is no disruption to their current business model and that they can continue to serve clients is the responsibility of all operators in all financial services sectors. Notably, the Commission is not concerned, at this stage, about any contractual continuity issues on the principle that the performance of existing obligations can continue post-Brexit. However, the Commission notes that "every type of contract needs to be looked at separately."
UK Secondary Legislation Laid Before Parliament Amending Building Societies Legislation
A draft of the Building Societies Legislation (Amendment) (EU Exit) Regulations 2018 has been laid before Parliament. The Regulations will come into force on the day the U.K. withdraws from the EU.
The draft Regulations have been prepared using the power under the European Union (Withdrawal) Act 2018 to address failures of retained EU law to operate effectively or other deficiencies arising from the withdrawal of the U.K. from the EU. The draft Regulations make amendments to various U.K. primary and secondary legislation that relate to building societies. The amendments remove references to EEA countries and territories, EU directives and EU member states that will no longer be appropriate following the U.K.'s withdrawal. In addition, the amendments remove provisions that provide reciprocal treatment to borrowers whose loans are secured on land in an EEA state and to bodies incorporated in an EEA state.
UK Secondary Legislation Laid Before Parliament on Regulators' Powers to Onshore EU Technical Standards on Brexit
A revised draft of the Financial Regulators' Powers (Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018 has been laid before Parliament. The Regulations will come into force the day after the day on which they are made.
The draft Regulations, which include some changes to the original draft published in April 2018, among other things empower the Bank of England, the Financial Conduct Authority, the Prudential Regulation Authority and the Payment Systems Regulator to make EU Exit instruments and to make any necessary amendments to the Regulatory Technical Standards and Implementing Technical Standards that comprise "level 2" of the EU financial services legislation that will be onshored (that is, converted into U.K. law) on the U.K.'s withdrawal from the EU. A schedule to the draft Regulations sets out a full list of technical standards that will be onshored and allocates responsibility for making EU Exit instruments to one or more of the regulators.
The draft Regulations have been prepared under the EU (Withdrawal) Act 2018, which sets out an enhanced scrutiny procedure for secondary legislation used to amend certain retained EU law. This means that the draft Regulations will require the approval of both Houses of Parliament before they are made.
View the draft Regulations.
View the draft explanatory memorandum.
View details of the proposed approach to onshoring EU legislation.
View details of the EU (Withdrawal) Act 2018.
European Securities and Markets Authority Urges UK Financial Institutions to Apply for EU Authorizations Now
The European Securities and Markets Authority has issued a public statement urging U.K.-based financial institutions to prepare for a hard Brexit. In particular, ESMA states that firms wishing to continue providing services across the EU after the U.K. has exited the EU must make timely applications for authorization to the relevant national regulators in the EU member state in which the firm wants to relocate its business. ESMA notes that it has seen an increase in applications being made and highlights that some national regulators have stipulated that applications needed to be received in June/July 2018 for approval to be granted in time.
View ESMA's statement.
UK Government Publishes White Paper on the Future Relationship Between the UK and the EU
The U.K. Government has published a White Paper setting out its approach and proposals for a future relationship between the U.K. and the EU. The Government is proposing new economic and regulatory arrangements for financial services that would give both the EU and the U.K. autonomy over decisions regarding access to its market. The Government acknowledges that both the EU and the U.K. will want to legislate for their own interests to take account of the differences in the EU and U.K. markets, business models as well as financial stability exposures.
The Government does not intend to replicate the existing EU passporting regime, which is reserved for countries falling within the single market. Instead, the Government intends that the new arrangements would be based on an enhanced equivalence regime that would enable the cross-border provision of the most important financial services and would preserve regulatory and supervisory cooperation. The Government states that the existing equivalence frameworks would need to be expanded, because the EU's equivalence regime does not cover the breadth of U.K. and EU financial services provision and because there are no provisions which ensure a transparent and predictable process with lasting effect.
UK Financial Policy Committee Outlines Steps to Reduce Risks to the UK's Financial Stability
The Bank of England has published a Financial Stability Report, dated June 2018, and a record of the Financial Policy Committee Meeting held on June 19, 2018. The Report sets out the FPC's view of the U.K.'s financial stability, the resilience of the U.K.'s financial system and the risks posed to each of those. Where applicable, the Report also notes the steps that the FPC is taking to address the risks. The record of the meeting provides a summary of issues discussed by the FPC in June.
First UK Statutory Instrument Made Under the European Union (Withdrawal Act) 2018
The European Union (Withdrawal) Act 2018 (Commencement and Transitional Provisions) Regulations 2018 have been made. These Regulations are the first statutory instrument to be made under the EU (Withdrawal) Act 2018, which was made on June 26, 2018. The Regulations bring into force some of the provisions of the Act. The Act, which was also formerly referred to as the Great Repeal Bill, ensures that the U.K.'s laws will continue to operate from the day the U.K. exits the EU.
View the Regulations.
View details of the EU (Withdrawal) Act 2018.
UK Government and Regulators Set Out Approach to Onshoring Financial Services Legislation for Brexit
Following the enactment of the European Union (Withdrawal) Act 2018, HM Treasury has 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.
UK Brexit Legislation Receives Royal Assent
The EU (Withdrawal) Bill has received Royal Assent from Her Majesty the Queen and has become an Act of Parliament, the EU (Withdrawal) Act 2018. The Act, which was also formerly referred to as the Great Repeal Bill, is necessary to ensure that the U.K.'s laws continue to operate from the day the U.K. exits the EU.
From the date of the U.K.'s exit from the EU, the Act will (i) end the supremacy of EU law in U.K. law by repealing the European Communities Act 1972; (ii) convert EU law as it stands at the moment of exit into domestic law before the U.K. leaves the EU; and (iii) maintain the current scope of devolved decision making powers in areas currently governed by EU law.
The Act also creates powers to make secondary legislation, including temporary powers to enable corrections to be made to the laws that would otherwise no longer operate appropriately once the U.K. has left the EU and to implement the withdrawal agreement under Article 50 of the Treaty on European Union. The Government will now start work to begin laying before Parliament the expected 800 pieces of secondary legislation that will be required to prepare the U.K.'s statute book for EU withdrawal.
European Banking Authority Warns Financial Institutions to Prepare for a Hard Brexit
The European Banking Authority has published an Opinion on preparations for the withdrawal of the U.K. from the EU. The Opinion is addressed to EU national regulators and regulators in the European Free Trade Area States (Norway, Liechtenstein and Iceland), the European Central Bank and the Single Resolution Board. The Opinion concerns the activities of financial institutions in the context of preparing for the U.K.'s withdrawal. Financial Institutions comprise credit institutions, investment firms, payment service providers, electronic money institutions, creditors and credit intermediaries.
The purpose of the Opinion is to encourage national regulators to ensure that financial institutions are adequately considering the risks that arise from the possible departure of the U.K. from the EU in March 2019 without a ratified withdrawal agreement in place (a so-called "hard" Brexit). The EBA also seeks to ensure that national regulators draw the attention of financial institutions to their consumer protection obligations should that eventuality occur.
European Securities and Markets Authority Publishes Annual Report
The European Securities and Markets Authority has published its Annual Report, dated June 15, 2018. The report sets out ESMA's key achievements against its 2017 objectives of promoting supervisory convergence, assessing risks to investors, markets and financial stability, completing a single rulebook for the EU financial markets and directly supervising trade repositories, credit rating agencies and third-country CCPs. The report also discusses ESMA's contributions to the work of the Joint Committee of the European Supervisory Authorities.
The report does not consider the focus areas for ESMA in 2018, which are set out in ESMA's work programes. However, ESMA indicates that in 2018 it will be, among other things: (i) issuing further opinions on pre-transparency waivers under the Markets in Financial Instruments package; (ii) engaging with credit rating agencies and trade repositories on their strategy, governance, operational matters and preparations for Brexit; and (iii) continuing its work to finalize the technical standards and technical advice under the EU Prospectus Regulation.
View ESMA's Annual Report.
European Banking Authority Issues Annual Report for 2017
The European Banking Authority has published its Annual Report for 2017.
The Annual Report summarizes the progress made in a number of workstreams undertaken by the EBA in 2017, including the EBA's work on: (i) developing and maintaining an EU Single Rulebook for banking; (ii) promoting supervisory convergence; (iii) developing resolution policies and promoting common approaches for the resolution of failing financial institutions; (iv) determining and monitoring key risks in the banking sector across Europe; (v) strengthening the EBA's role as EU data hub for the collection, use and dissemination of banking data; (vi) protecting consumers, monitoring financial innovation and contributing to easy retail payments in the EU; (vii) Brexit preparations; (viii) international engagement; and (ix) cross-sectoral work by the European Supervisory Authorities under the Joint Committee.
UK Sanctions and Anti-Money Laundering Act 2018 Receives Royal Assent
The Sanctions and Anti-Money Laundering Act 2018 has received Royal Assent and came partly into force on May 23, 2018. The majority of the provisions of the Act will enter into force on a day appointed by the Secretary of State. The Act will provide a domestic sanctions framework after the U.K. leaves the EU, enabling the U.K. to continue to meet its international obligations and use sanctions as a national security and foreign policy tool.
The Act's provisions empower the U.K. Government to make sanctions regulations to be imposed, where appropriate, to comply with United Nations obligations or other international obligations, to further the prevention of terrorism, for the purposes of national security or international peace and security, or to further foreign policy objectives. The Act also empowers the U.K. Government to create, amend and update regulations for the detection, investigation and prevention of money laundering and terrorist financing and for the purposes of implementing standards published by the Financial Action Task Force relating to combating threats to the integrity of the international financial system.
View the Sanctions and Anti-Money Laundering Act 2018.
EU and UK to Establish Technical Working Group for Risk Management Around Brexit
The European Commission and HM Treasury have announced that the European Central Bank and the Bank of England will establish a technical working group on risk management in the period around March 30, 2019 for financial services. The U.K. leaves the EU on March 29, 2019, although the provisionally agreed transition period means that most EU laws will continue to apply in the U.K. until December 31, 2020.
The Terms of Reference for the working group state that the European Commission and HM Treasury will attend the group as observers. Other regulatory authorities will be invited to attend on an issue-specific basis.
View the announcement.
View the terms of reference.
US and UK Establish Financial Regulatory Working Group
The U.S. Treasury Department and HM Treasury have issued a joint statement announcing the establishment of a Financial Regulatory Working Group. The Working Group will be a forum for treasury staff and financial regulatory authorities to exchange views on the regulatory relationship between the United States and the U.K. The objectives of the Working Group will be to further financial regulatory cooperation, improve transparency, reduce regulatory uncertainty, identify possible cross-border implementation issues, address regulatory arbitrage and work towards achieving compatibility of U.S. and U.K. laws and regulations.
View the statement.
European Supervisory Authorities Make Recommendations to Address Risks in EU Securities, Banking and Insurance Sectors
The Joint Committee of the European Supervisory Authorities has published a report on risks and vulnerabilities in the EU financial system. The ESAs are the European Securities and Markets Authority, the European Banking Authority and the European Insurance and Occupational Pensions Authority. The ESAs make recommendations for policy actions by the ESAs, national regulators and financial institutions. A summary of the risks and recommendations contained in the report is set out below.
- To combat cyber risks, the ESAs recommend that financial institutions should continue to improve IT systems, explore risks in the context of information security and take steps to resolve risks surrounding connectivity and outsourcing to third-party providers. The ESAs will continue to keep these risks under review. ESMA is launching a supervisory project on cloud computing outsourcing and will continue work to address supervisory convergence. The EBA is developing guidelines on the management of information and communication technology risks. EIOPA is conducting a qualitative exercise on cyber risk with national regulators and the industry.
UK Financial Conduct Authority Publishes its 2018/19 Business Plan
The Financial Conduct Authority has published its Business Plan for 2018/19 which sets out its key priorities for the coming year. The FCA confirms that it will continue to focus on issues relating to the U.K.'s withdrawal from the EU by working with the Government, ensuring appropriate transition measures for EEA firms, working towards operational readiness and cooperating at international level.
The FCA divides the remainder of its priorities into cross-sector priorities and sector priorities. There are seven cross-sector priorities: firms' culture and governance; financial crime and anti-money laundering; data security, resilience and outsourcing; innovation, big data, technology and competition; treatment of existing customers; long-term savings, pensions and intergenerational differences; and high-cost credit. There are seven sector priority areas: wholesale financial markets; investment management; retail lending; pensions and retirement income; retail investments; retail banking; and general insurance and protection. The FCA also published Sector Views for each of these sectors which provide an FCA view of how each sector was performing as of mid-2017.
UK Prudential Regulation Authority Publishes its 2018/19 Business Plan
The Prudential Regulation Authority has published its Business Plan for 2018/19 which sets out its strategic goals and workplan to deliver those goals. The PRA also published a consultation paper on its fees and levies for 2018/19 alongside the Business Plan as well as a report to the Prudential Regulation Committee on the adequacy of PRA resources and independence of PRA functions.
Read a summary of the PRA's goals and workplan.
UK Regulators Confirm Approach to Authorization and Supervision of International Banks, Investment Firms, Insurers and CCPs Under Brexit Transitional Agreement
Following the announcement on March 19, 2018 that a transitional period for Brexit had been agreed between the U.K. and the EU, the U.K. regulators have published statements setting out their expectations regarding firms' preparations for the U.K.'s withdrawal from the EU. The agreed transitional period is from March 29, 2019 until December 31, 2020 and EU law will remain applicable in the U.K. during that time. Both the Financial Conduct Authority and the Bank of England have stated that, subject to the ratification of the transitional agreement, firms carrying on regulated activities in the U.K. through an EU passport can plan to continue doing so during the implementation period on the same basis as they do now and that U.K. authorization would only be needed by the end of that period.
The BoE has also confirmed its approach to the authorization and supervision of international banks, designated investment firms and insurers. The Prudential Regulation Authority has published "Dear CEO&" letters addressed to the CEOs and branch managers of banks, insurers and designated investment firms that undertake cross-border activities between the U.K. and the rest of the EU, together with updated Policy Statements and Supervisory Statements on the PRA's approach to the branch authorization and supervision of EEA banks, insurers and designated investment firms. Following consideration of feedback to the PRA's consultation on updating its approach to branch authorization and supervision, the PRA confirms that it has not made any significant changes to the versions it consulted on, except that the threshold for liabilities protected by the Financial Services Compensation Scheme has been increased from £200 million to £500 million. The PRA's new approach for banks, investment firms and insurers comes into effect on March 29, 2018.
UK and EU Negotiators Agree Brexit Transition Period
The European Commission and the U.K. government have jointly published the latest draft withdrawal agreement for the U.K.'s departure from the EU which, among other things, reflects the agreement reached on the post-Brexit transition period.
The draft withdrawal agreement includes some sections which are agreed (subject to legal drafting) and others which remain to be finalized. It includes final wording concerning an agreed "transition" or "implementation" period, that will run until December 31, 2020. The draft agreement departs from the previous draft circulated by the European Commission on March 15, 2018, by providing that the U.K. will be free to negotiate, sign and ratify international agreements in its own capacity during the transition. Any agreements negotiated by the U.K. must not enter into force or apply during the transition period, unless authorised by the EU.
The draft agreement also contains the agreed legal text for citizens' rights and concerning the financial settlement, as well as agreed text on a number of other provisions. Financial services and other services remain among issues that are not addressed by any agreed text. The U.K. and EU negotiators aim to finalize the entire withdrawal agreement by October 2018.
View the draft withdrawal agreement.
UK Financial Conduct Authority Launches Survey for EEA Firms Operating in the UK Under Single Market Passports
The U.K. Financial Conduct Authority has launched a short online survey seeking information from European Economic Area firms currently operating in the UK under a passport. The information obtained will identify those firms for which a “temporary permission” may be relevant following the U.K.’s withdrawal from the European Union. The possibility of a “temporary permission regime” was raised by HM Treasury in December 2017 as a means by which firms previously operating under a passport would be able to enter into new business and fulfil existing contracts with U.K. customers for a period of time after exit day, while seeking full authorization in the U.K.. HM Treasury has not yet prepared legislation relating to the temporary permissions regime, and EU-U.K. negotiations are in any event ongoing, however the FCA believes that it is likely that firms operating under a passport would need to inform it of their intention to operate under the temporary regime via a straightforward notification process in advance of the U.K.’s withdrawal.
UK Prime Minister Speech on the UK’s Future Economic Partnership with the EU
The U.K. Prime Minister delivered her third major speech on the future partnership between the U.K. and the European Union following Brexit. In it, the Prime Minister restated the key elements and provided greater detail about the U.K.’s aims for a free trade agreement with the EU post-Brexit.
The Prime Minister was candid about the fact there are some “hard facts” to be accepted, one of which is that access to each other’s markets may in certain ways be less than it is now. Two key aspects of the speech are of particular interest for financial services businesses and their advisers.
European Securities and Markets Authority Outlines 2018 Work Programme for Credit Rating Agencies, Trade Repositories and Monitoring of Non-EU CCPs
The European Securities and Markets Authority has published a document combining its 2017 Annual Report and 2018 Work Programme in relation to Trade Repositories, Credit Rating Agencies and third-country Central Counterparties.
ESMA is the single direct supervisor of Credit Rating Agencies and Trade Repositories in the European Union. It also has direct responsibilities regarding the registration, supervision and recognition of TRs based outside the EU. The 2017 Annual Report highlights its direct supervisory activities and key achievements in 2017 in respect of eight registered TRs, 26 registered CRAs and four certified CRAs. ESMA recognised 10 third-country CCPs in 2017 and conducted monitoring of the activities and services provided by those third-country CCPs in the EU.
ESMA has conducted a supervisory risk assessment regarding CRAs and TRs in the EU. The 2018 Work Programme sets out the supervisory priorities for the year ahead that ESMA has identified for CRAs and TRs and also highlights issues affecting both CRAs and TRs where ESMA will be conducting further work. These areas include Brexit, fees charged by CRAs/TRs, internal control frameworks, cloud computing and guidelines for periodic information.
European Securities and Markets Authority Outlines 2018 Plans for EU Supervisory Convergence
In addition to the key priorities, the 2018 programme also sets out ESMA key objectives and main planned outputs in relation to a number of thematic and cross-cutting issues, including: investor protection and intermediaries; secondary markets; investment management; market integrity (including market abuse and benchmarks); post-trading (including CCPs, securities financing and settlement); corporate finance (in particular the new prospectus regime); corporate reporting; market data; financial innovation; IT infrastructure; and peer reviews.
The European Securities and Markets Authority has published its Supervisory Convergence Work Programme for 2018. It highlights a total of five key priorities for its work on supervisory convergence in 2018, comprised of three ongoing priorities (application of the revised Markets in Financial Instruments framework, data quality and investor protection) and two new priorities (Brexit and financial innovation).
European Commission Publishes Position Paper on Brexit Transitional Period
The European Commission has published a position paper, titled "Transitional Arrangements in the Withdrawal Agreement", which has been prepared by its Task Force for the Preparation and Conduct of the Negotiations with the United Kingdom.
A transitional period was agreed in principle in December 2017. The stated aim of the position paper is to outline in legal terms how arrangements for the transition period following Brexit should be given effect in the eventual Withdrawal Agreement. Draft clauses for the Withdrawal Agreement relate to the duration of the transition period, the application of EU law to the UK during the transition, the extent to which the UK Parliament and the Bank of England can participate in the EU institutions and the extent to which the UK can participate in the EU's international activities or conclude its own international agreements.
The position paper also contains a draft clause giving jurisdiction to the European Court of Justice to rule on disputes during the transition period. A footnote to the draft clause calls for a mechanism to be put in place within the Withdrawal Agreement whereby the EU would be allowed to "suspend certain benefits deriving for the United Kingdom from participating in the internal market" in circumstances where the EU considers that the ECJ would not provide remedies within an appropriate timeframe.
The negotiations between the UK and EU will resume in March 2018.
View the position paper.
Andrew Bailey, Head of the Financial Conduct Authority Discusses Brexit
The Chief Executive of the Financial Conduct Authority, Andrew Bailey, gave a speech on Brexit at the Future of the City dinner. Mr. Bailey called for a joint commitment by the political authorities to a defined implementation period before the end of March this year and confirmed that the FCA regards Brexit as a top priority. He discussed the operational issues that may arise as a result of Brexit, for example, contractual continuity for derivatives and insurance contracts, UK CCP clearing services and the holding and sharing of data. He also highlighted that mutually agreed and enacted provisions in both the UK and the EU were needed to properly address these matters. The FCA is working with the UK Government to ensure that the UK has a functioning regulatory regime on the date of Brexit and during any transitional period. The UK Government has confirmed that it will introduce draft legislation, if needed, to ensure an interim regulatory permissions regime and to ensure contractual continuity.
In addition, Mr. Bailey discussed the advantages to both the EU and the UK of adopting a mutual recognition regime post-Brexit which continues the existing open financial markets. He noted that during the EU's negotiations with the US on the Transatlantic Trade and Investment Partnership, the EU proposed the inclusion of financial services in the trade agreement, which was based on mutual recognition and close regulatory cooperation, and suggested that the proposal could be used as a starting point for the EU and UK to agree a framework for mutual recognition.
View the text of the speech.
Nausicaa Delfas Appointed as Executive Directive of International at the Financial Conduct Authority
The Financial Conduct Authority has appointed Nausicaa Delfas as Executive Directive of International. The appointment creates a new role at the FCA and highlights the importance of developing the FCA's strategy for international engagement, especially in the lead up to the UK's withdrawal from the EU.
View the FCA's press release.
UK Regulators Confirm Approach to Authorization and Supervision of International Banks, Investment Firms, Insurers and CCPs Post-Brexit
The Bank of England, the Prudential Regulation Authority and the Financial Conduct Authority have published consultations and planning considerations affecting international banks, investment firms, insurers and CCPs conducting cross-border activities into and from the UK. The UK Government has also made an announcement that, if necessary, it will legislate to enable EEA firms and funds operating in the UK to obtain a “temporary permission” to continue their activities in the UK for a limited period after withdrawal. Alongside the temporary permissions regime, it will also legislate, if necessary, to ensure that contractual obligations, such as insurance contracts, which are not covered by the temporary regime, can continue to be met. It will also bring forward secondary legislation to empower UK authorities to carry out functions currently carried out by EU authorities relating to CCPs, central securities depositaries, credit rating agencies and trade repositories.
UK Government's Strategy for the UK's Asset Management Industry
HM Treasury has published the second UK Investment Management Strategy which sets out the UK Government's long-term strategy for ensuring that the UK remains a globally competitive location for asset management. The Government believes that action should be taken now to respond to the challenges and the opportunities for the asset management industry arising out of Brexit, and that this is the best time to renew the 2013 Strategy, which focused mostly on fund domicile issues.
EU Proposed Regulation Moving the European Banking Authority to Paris Due to Brexit
The European Commission has published a proposed Regulation to formalize the decision to move the European Banking Authority from London to Paris as a result of the decision by the UK to leave the EU. The proposed Regulation will apply from the date on which the European Union Treaties cease to apply to the UK or from March 30, 2019, whichever is earlier. The proposed Regulation only confirms the move and does not address any of the operational aspects.
Feedback on the proposed Regulation is possible until January 29, 2018.
View the proposed Regulation.
UK Financial Stability Report Published
The Financial Policy Committee of the Bank of England has published the latest UK Financial Stability Report. The FPC notes that the UK banking system is resilient and that UK banks are stronger than they were 10 years ago. The results of the stress test show that no bank needs to improve its capital position. However, as a result of the stress test, the FPC has decided to raise the UK countercyclical buffer rate from 0.5% to 1% from November 28, 2018. In addition, the Prudential Regulation Committee will set capital buffers for individual banks. The FPC will reconsider the countercyclical buffer rate during the first half of 2018.
The FPC continues to assess the risks posed by Brexit and concludes that Brexit presents a material risk to the provision of financial services to customers in both the UK and the EU. Three main risks are discussed: risks associated with bringing EU legislation into UK law through the Great Repeal Bill, risks to the continuity of outstanding cross-border contracts and risks presented by barriers to cross-border financial services provision.
The FPC considers that the extent and nature of the changes to be brought in through the Great Repeal Bill will depend on the terms of the UK's withdrawal agreement and there is a tight timeframe in which it all needs to be achieved. In addition to the Great Repeal Bill, secondary legislation is needed, and the regulators will need to change their rulebooks. Firms will also need to make changes to comply with the amended legal framework.
European Central Bank Highlights Challenges for Smaller Eurozone Firms
The European Central Bank has published a Report on the supervision of less significant institutions under the Single Supervisory Mechanism. The SSM is made up of the ECB and national regulators of Eurozone member states, and is responsible for the prudential supervision of all banks in the euro area. The ECB directly supervises the larger firms, classified as significant institutions, and national regulators directly supervise the less significant institutions, subject to the oversight of the ECB. The ECB is also responsible for certain common procedures, such as the granting and withdrawal of authorization and the acquisition of qualifying holdings in SSM firms. The ECB can issue guidelines, regulations or general instructions to the SSM national regulators or even take over the direct supervision of a less significant institution (at its own initiative or at the request of the national regulator).
The ECB's Report discusses the main concerns for less significant institutions, which include competition, and suggests that less significant firms may choose to consolidate businesses to improve profitability. The Report also sets out the steps that the SSM supervisory functions have taken towards harmonizing supervisory approaches to level the playing field, and highlights that the key challenge that needs to be addressed is the use of different accounting systems because that hinders comparability of data between the firms. Finally, the ECB indicates that it is developing specific policy positions and operational guidance on issues relevant to Brexit and the likely relocation of some activities of UK firms moving into the Eurozone.
View the report.
US Regulator Warns EU about Proposed Extraterritorial Overreach
The Commodity Futures Trading Commission Chairman J. Christopher Giancarlo has authored an opinion piece in the Wall Street Journal warning of potential consequences if the European Union mishandles Britain's impending exit from the EU. The European Commission's proposed amendments to the European Market Infrastructure Regulation and the regulation establishing the European Securities and Markets Authority would provide ESMA and the European Central Bank with greater supervisory powers over third-country CCPs. Specifically, Chairman Giancarlo argued that the European Commission’s proposed rulemaking that would authorize regulation of financial entities outside the EU by the European Central Bank and ESMA would result in overlapping and uncoordinated regulation in US financial markets. Chairman Giancarlo believes this lack of harmonization and clear jurisdictional limitations could prove expensive and damaging to US economic growth and ultimately impact job growth. Additionally, Chairman Giancarlo suggests that submitting to European rules could set a dangerous precedent going forward which could result in further imposition of European costs and regulatory burdens on the US economy.
View the article.
Brexit: European Banking Authority Warns Against Letter-Box Entities
The European Banking Authority has published an Opinion on issues relating to Brexit where a UK firm seeks to establish an entity within the EU27. The Opinion is addressed to the European Commission, national regulators of member states, the European Central Bank in its role as bank prudential supervisor for entities established in the eurozone and to national regulators in Norway, Lichtenstein and Iceland (as per the EEA Agreement). The Opinion is intended to provide guidance on supervisory expectations and to address regulatory and supervisory arbitrage issues that may arise as firms consider establishing entities within the EU27 before the date of the UK's exit from the EU. The Opinion covers areas such as the authorization process, equivalence access for investment services, internal model approvals, resolution and deposit scheme issues and internal governance and risk management. In particular, the Opinion addresses outsourcing and risk transfers using back-to-back or intragroup transactions. The EBA states that 'letter-box' or 'empty shell' entities do not meet the existing regulatory requirements and that national regulators should assess whether outsourcing is being used solely as a means of obtaining an EU passport. The EBA also considers that a group with a new EU27 entity that uses back-to-back or intragroup transactions to transfer risk must have enough capital, risk management and operational capabilities to absorb any material unhedged or unsecured portfolio in the event of the default of the group entity to which the risks have been transferred.
View the EBA's Opinion.
EU Final Draft Technical Standards on the Trading Obligation for Derivatives Published
The European Securities and Markets Authority has published a final Report and final draft Regulatory Technical Standards on the trading obligation for derivatives under the Markets in Financial Instruments Regulation. The trading obligation is applicable to classes of derivatives that: (i) have been declared subject to the clearing obligation under the European Market Infrastructure Regulation, (ii) are admitted to trading or traded on at least one EU trading venue (a regulated market, multilateral trading facility, organized trading facility or a third country equivalent trading venue) and (iii) are sufficiently liquid. The trading obligation will apply to financial counterparties and to non-financial counterparties. Where ESMA determines that a class of derivatives should be subject to the MiFIR trading obligation, third country trading venues would only be permissible for trading by EU entities when determined to be equivalent by the European Commission.
The final draft RTS on the trading obligation provide for the trading obligation to apply to fixed-to-float interest rate swaps denominated in euros, US dollars and pound sterling and to index credit default swaps (iTraxx Europe Main and iTraxx Europe Crossover). The trading obligation for both IRS and CDS will apply from January 3, 2018, unless the clearing obligation for a particular class of derivatives has not yet entered into force.
European Commission Legislative Proposals for Enhanced Powers for European Supervisory Authorities and the European Systemic Risk Board09/20/2017
The European Commission has published legislative proposals designed to strengthen and further integrate the supervisory framework of the European Union. The proposals build on contributions to the Commission's public consultation in autumn 2016 on the European Systemic Risk Board and its public consultation in spring 2017 on the European Supervisory Authorities – the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority.
European Banking Authority Issues Final Draft Regulatory and Implementing Technical Standards on Applications for Authorization of Credit Institutions
The European Banking Authority has published its final draft Regulatory Technical Standards setting out a comprehensive list of the information that must be provided to national regulators by firms applying for authorization as a credit institution under the Capital Requirements Directive. The final draft RTS are accompanied by final draft Implementing Technical Standards which set out the various procedures and requirements for making applications, along with a template to be used and guidance on how national regulators should deal with incomplete applications. The next step is for the European Commission to consider the draft RTS and ITS with a view to making a decision whether to endorse them via delegated legislation. In an accompanying press release, the EBA urges the Commission to consider adopting the RTS and ITS at the earliest opportunity to enable processing of applications from entities seeking to relocate to continental Europe in the context of the UK's withdrawal from the European Union.
View the EBA Final Report.
View the Press Release.
Great Repeal Bill Introduced to UK Parliament
The draft legislation for the exit of the UK from the European Union has been introduced to the House of Commons. The European Union (Withdrawal) Bill 2017-2019, which has previously been referred to as the Great Repeal Bill and also as the Repeal Bill, is a legislative measure which performs four main functions. It will: (i) end the supremacy of EU law in UK law by repealing the European Communities Act 1972; (ii) convert EU law as it stands at the moment of exit into domestic law before the UK leaves the EU; (iii) create powers to make secondary legislation, including temporary powers to enable corrections to be made to the laws that would otherwise no longer operate appropriately once the UK has left the EU and to implement the withdrawal agreement under Article 50 of the Treaty on European Union; and (iv) maintain the current scope of devolved decision making powers in areas currently governed by EU law. The Bill must pass through both Houses of Parliament before it can receive Royal Assent.
View the European Union (Withdrawal) Bill 2017-2019.
View the Explanatory Notes to the Bill.
View webpage for the Bill.
View the Shearman & Sterling Client Briefing.
European Securities and Markets Authority Issues Sector-specific Principles on Relocations from the UK to EU27 in the Context of the UK's Exit from the EU
The European Securities and Markets Authority has published three Opinions setting out sector-specific principles for Brexit-related relocations in the sectors of investment management, investment firms and for secondary markets. These sector-specific Opinions build on a cross-sector Opinion published in May 2017. The principles do not set out any new legal requirements, but they are intended to serve as practical tools to support supervisory convergence among national regulators in EU27 countries when approached by UK market participants seeking to relocate in the content of the UK's exit from the EU. The Opinions have been published in the wake of reports that some member state regulators have been marketing their jurisdictions as locations for business and it has been thought that some regulators may have been offering a lighter-touch form of regulatory and especially "presence" standards than others.
The Opinions, which assume (without prejudice to ongoing negotiations) that the UK will become a third country on exit from the EU, highlight particular issues national regulators in EU27 should consider when considering applications from relocating market participants. Factors for close consideration include governance structure and internal control, the impact and influence of group membership, the nature and extent of proposed outsourcing arrangements and the need to mitigate the risk of letter-box entities. ESMA also recommends that national regulators consider co-operation arrangements with third country regulators where appropriate.
View Opinion on Investment Firms.
View Opinion on Investment Management.
View Opinion on Secondary Markets.