Shearman & Sterling LLP | Financial Regulatory Developments Focus | UK Government Issues Brexit "No-Deal" Guidance for Financial Services
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  • 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.

    On March 29, 2019, the European Union (Withdrawal) Act 2018 will adopt EU law into the U.K. statute book and also empowers U.K. government ministers to amend EU laws so as to ensure a fully functioning regulatory framework for financial services on exit day. In a no deal scenario, the U.K. will fall outside the EU's regulatory framework for financial services and, in particular, it will not be possible for U.K. firms or EEA firms to provide services or activities in the EEA or U.K. respectively on the basis of the current single market passports. U.K. firms' regulatory position in relation to the EU would be determined by the relevant member state rules and any applicable EU rules that apply to third countries (countries outside of the EEA) at that time.

    The technical notice explains that the U.K. will also treat EEA firms as third-country firms by default, but that the U.K. will minimize disruption for firms passporting into the U.K. prior to exit day and their customers, by introducing a temporary permissions for firms and a temporary recognition regime for non-U.K. CCPs. The government also intends to introduce similar temporary regimes for EEA electronic money and payment institutions, registered account information service providers and EEA funds that are marketed into the U.K. Planned U.K. legislation will also establish transitional arrangements for central securities depositories, credit rating agencies, trade repositories, data reporting service providers, systems currently designated under the Settlement Finality Directive and depositaries for authorised funds.

    The technical notice clarifies a number of areas:
    1. There will be no, or no significant, implications from a "no deal" scenario for U.K.-based customers of U.K.-based providers (including U.K. subsidiaries of EEA firms). However, there could be some costs increases due to loss of direct access to central payments infrastructure - such as TARGET2 and the Single Euro Payments Area (SEPA) - and from the fact that cross-border card payments between the U.K. and EU will no longer be covered by EU legislation banning surcharges.
    2. Disruption will be minimized for U.K.-based customers of U.K.-based providers due to the U.K. temporary permissions regimes.
    3. The position of EEA customers (including U.K. citizens living abroad) of U.K. firms operating in the EEA is less clear, as a matter in respect of which the U.K. cannot take unilateral action to fully remediate risks of access or other issues. Absent action from the EU or its member states to minimize disruption (perhaps by introducing measures similar to the U.K.'s temporary regimes) or reliance by firms on applicable third country regimes, the loss of the financial services passport could mean, for example, that the access of EEA clients to U.K.-based financial institutions will be constrained. The government proposes to take unilateral action, if necessary, to resolve this issue on the U.K. side, and will work with the EU to identify and fully address these risks.
    4. The U.K. authorities are ready to agree cooperation arrangements with their EU counterparts as soon as is possible, to bring the U.K. into line with other third countries. Once these arrangements are in place, for example, asset management firms should be able to continue to use the delegation model, whereby EU legislation permits fund managers to delegate portfolio management services to a third party in another country, including countries outside the EU.
    5. U.K.-based clearing members (and their clients) using U.K. CCPs will not need to take any action as a result of Brexit.
    6. The temporary regime for non-U.K. CCPs will enable non-U.K. CCPs to continue to provide services to the U.K. for a period of up to three years. This will minimize the impact of Brexit for U.K.-based users of non-U.K. CCPs (including EEA CCPs).
    7. The government will bring forward legislation to counteract the fact that the U.K. will no longer be a part of the EU Settlement Finality Directive framework, which allows designated Financial Market Infrastructures to benefit from protections from insolvency actions. This proposed U.K. legislation will allow designations of non-U.K. FMIs, give powers to the Bank of England to designate these FMIs and provide for a temporary regime that would enable certain non-U.K. FMIs to continue to benefit from U.K protections currently provided for by the EU Settlement Finality Directive. The EU has not proposed similar measures to designate U.K. FMIs, with the result that EU settlement finality protection for U.K. FMIs may fall away.
    8. U.K. trading venues will cease to be EU trading venues on Brexit. Unless there is action from the EU, the impact of this could be reduced market liquidity, in that some EEA firms may not be able to be members of U.K. venues and U.K. venues will also not be eligible venues for EEA firms to execute certain equity and derivatives trades.
    9. In addition, U.K.-based market participants may no longer be able to undertake certain equity and derivatives trades on EEA trading venues and would have to use alternative U.K. and international venues instead. EU market operators wishing to continue to undertake regulated activities in the U.K. will need to seek recognition as a Recognised Overseas Investment Exchange. Notably, there does not appear to be any proposed temporary permissions regime for EU exchanges, meaning that these will need to become Recognised Overseas Investment Exchanges in the U.K. from the point of Brexit in order to maintain meaningful U.K. access.
    10. The Financial Conduct Authority will be empowered by new legislation to authorize and regulate both U.K. and non-U.K. Credit Rating Agencies and Trade Repositories after Brexit. The FCA will also be empowered to allow U.K. CRAs and TRs to convert their existing EU authorisation into a U.K authorisation. However, if no action is taken by the EU, EEA firms will no longer be able to access these U.K. firms and, unless the EU acts by endorsing or finding U.K. CRAs equivalent, the ratings of U.K. CRAs will no longer be able to be used in the EU for regulatory purposes after Brexit.
    11. The government proposes to bring forward legislation in September 2018 to introduce a temporary regime to minimise the impact on U.K. customers of both EU CRAs and TRs.
    12. Transfer of personal data between the U.K. and the EU will be the subject of a separate technical notice to be published by HM Treasury.

    View the technical notice.

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

    View our client note on recent Brexit developments.

    View the technical notice on the government's overarching approach to "no deal" preparations.

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