Shearman & Sterling LLP | Financial Regulatory Developments Focus | UK Conduct Regulator Consults on Brexit-Related Changes to Its Rulebook and Binding Technical Standards
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  • UK Conduct Regulator Consults on Brexit-Related Changes to Its Rulebook and Binding Technical Standards
    10/10/2018
    The U.K. Financial Conduct Authority has published its first consultation on proposed changes to the FCA Handbook to ensure a functioning legal and regulatory framework for financial services in the event of a "no-deal" scenario whereby the U.K. exits the EU on March 29, 2019 without a ratified Withdrawal Agreement in place and there is consequently no transitional period for firms. The proposed amendments will not take effect if the U.K. enters into a transitional period after exit day.

    The consultation includes the FCA's proposals in relation to the Binding Technical Standards it has been empowered by HM Treasury to amend prior to Brexit and to maintain afterward. These are the retained EU "Level 2" delegated and implementing regulations that set out regulatory technical standards and implementing technical standards. The consultation also sets out the FCA's proposed approach to non-legislative "Level 3" materials such as guidelines, recommendations and opinions that will also be onshored.

    The FCA states in the consultation that the majority of the proposed changes are consequential in nature and follow the amendments to retained EU law that HM Treasury is proposing, as set out in the series of financial services-related statutory instruments being made under the European Union (Withdrawal) Act 2018.

    The FCA has worked collaboratively with HM Treasury and other government departments. This first consultation covers amendments to the Handbook and BTS that flow from the provisions of the draft SIs that have been published by HM Treasury to date. The consultation covers:
    1. Cross-cutting issues. A number of Brexit-related amendments are being made to multiple parts of the Handbook. This includes, for example, replacing references to EU law with references to new or newly-revised U.K. law, removing references to EU Treaties and replacing references to EU institutions with references to U.K. institutions.
    2. Amendments to specific sourcebooks and chapters in the Handbook. In this consultation the FCA flags those sourcebooks and chapters that will be amended for cross-cutting issues and gives further explanations on its proposed changes for some sourcebooks, where it considers either that details of its rationale would be helpful or where it has deviated, along with HM Treasury, from the usual baseline approach of treating EEA firms as third-country firms after exit day. The FCA provides further details on changes to: (i) prudential standards; (ii) conduct of business rules; (iii) fund management rules; and (iv) the Handbook provisions implementing the revised Markets in Financial Instruments Directive and the Markets in Financial Instruments Regulation.
    3. The FCA's approach to Binding Technical Standards. Along with the Bank of England, the Prudential Regulation Authority and the Payment Systems Regulator, the FCA has been given delegated powers by HM Treasury - under the Financial Regulators' Powers (Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018 - to correct deficiencies in the BTS for Brexit and to maintain them afterward. The consultation sets out the FCA's proposed changes to some, but not all, of the financial services-related BTS, namely the BTS that relate to credit rating agencies, fund management, trade repositories, MiFID II/MiFIR, short selling and capital requirements. The amended BTS will be set out in legal instruments that will be approved by HM Treasury. The FCA proposes to remove some BTS that will not be applicable under the onshored legislation as they relate to obligations which will cease as the U.K. exits the EU. The FCA will consult on changes to the remaining BTS in a planned second consultation later in the year.
    4. The FCA's approach to non-legislative "Level 3" materials. The FCA sets out its approach to the broad range of non-legislative material produced by the European Supervisory Authorities or their predecessor bodies (for example, the Committee of European Securities Regulators) that will not be incorporated into U.K. law by the EUWA. This non-legislative material includes Guidelines, Recommendations, Opinions and Q&A. The FCA explains that it does not propose to carry out a detailed line-by-line review of all existing Level 3 materials and that firms and market participants should interpret existing Level 3 materials "sensibly and purposively" after Brexit. The FCA seeks feedback on proposed non-Handbook guidance to the effect that it expects as far as possible to comply with ESA Guidelines after Brexit (to the extent that it currently complies with them), that it recognizes the value and continuing relevance of Level 3 material and that it will expect firms and market participants to continue to apply Level 3 Guidelines and Recommendations as they did before exit day.

    The FCA is seeking responses to the consultation by December 7, 2018. Handbook provisions and BTS that have not been addressed in this consultation may be addressed in a second consultation later in the year when the related SIs have been published by HM Treasury. The FCA expects to issue feedback on this first consultation early in 2019 and final rules before March 29, 2019. The rule changes and BTS will take effect on March 29, 2019 in the event there is no agreed transition period. The FCA has been given a temporary transitional power to phase in the requirements on firms and states that it will be willing to consider exercising its waiver and rule modification powers to ease firms' transition to the new rules.

    View the consultation paper (FCA CP 18/28).

    View details of the proposed Temporary Transitional Powers for the U.K. regulators.

    View details of the European Union (Withdrawal) Act 2018.

    View details of the Financial Regulators' Powers (Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018.

    View details of the proposed arrangements for Credit Rating Agencies.

    View details of onshoring legislation for Trade Repositories.

    View details of onshoring legislation on capital requirements.

    View details of onshoring legislation on short selling.

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