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Friday, August 10, 2018 10.56AM
/ HM Treasury
1.1 This paper sets out HM
Treasury’s approach to laying financial services statutory instruments (SIs)
under the EU (Withdrawal) Act, which forms part of the wider work the
government is undertaking to prepare for the UK’s withdrawal from the EU. The
government is confident that the implementation period, agreed between the UK
and the EU earlier this year, will be in place between 29 March 2019 and 31
December 2020. Nevertheless, the government will ensure that a workable legal
regime is in operation whatever the outcome of negotiations.
The implementation period
1.2 The UK and the EU have agreed
the terms of an implementation period that will start on 29 March 2019 and last
until 31 December 2020. This will provide time to introduce the new
arrangements that will underpin our future relationship, and provide valuable
certainty for businesses and individuals. During the implementation period,
common rules will continue to apply. The UK will continue to implement new EU
law that comes into effect and the UK will continue to be treated as part of
the EU’s single market in financial services. This will mean that access to
each other’s markets will continue on current terms and businesses, including
financial services firms, will be able to trade on the same terms as now until
31 December 2020. UK firms will need to comply with any new EU legislation that
becomes applicable during the implementation period.
1.3 During this period, EU financial
services firms operating in the UK, and UK financial services firms operating
in the EU, will be able to continue to undertake regulated activities, either
by means of passporting rights or under other relevant EU frameworks.
Similarly, UK financial market infrastructures that are authorised under the
existing EU framework, such as central counterparties, will continue to be able
to provide services to the EU. EU and third country (non-EU) financial market
infrastructures that have existing authorisation or recognition under EU
legislation will continue to be able to provide services to the UK, enabling
access to financial market infrastructures without disruption.
1.4 Inbound firms that are currently
permitted to operate in the UK without UK authorisation or recognition may plan
on the assumption that UK authorisation or recognition will not be needed
before the end of the implementation period, following guidance from the UK’s
financial services regulators1 .
1.5 In addition to agreeing the
terms of the implementation period, good progress has been made across the
Withdrawal Agreement, and discussions are ongoing on the terms of the UK’s
future relationship with the EU. The UK and the EU will continue to progress
negotiations on the Withdrawal Agreement and Future Framework.
1.6 The government is seeking a deep
and special future partnership with the EU, which should be greater in scope
and ambition than any such agreement before and encompass financial services.
Given the highly regulated nature of financial services, the volume of trade
between our markets, and our shared desire to manage financial stability risks,
we would need a stable process for maintaining equivalent regulatory outcomes
as legislation evolves – including a system to resolve disagreements at
regulatory and supervisory levels – alongside an open, collaborative
relationship between supervisors that protects our respective financial systems
and our taxpayers from financial stability risks.
1.7 The government has confirmed its
intention to bring forward a new bill - the Withdrawal Agreement and
Implementation Bill - to give effect to the major elements of the Withdrawal
Agreement with the EU in domestic law, including the implementation period.2
The European Union (Withdrawal)
Act and financial services contingency preparations
1.8 While the government has every
confidence that a deal will be reached and the implementation period will be in
place, it has a duty to plan for all eventualities, including a ‘no deal’
scenario. The government is clear that this scenario is in neither the UK’s nor
the EU’s interest, and we do not anticipate it arising. To prepare for this
unlikely eventuality, HM Treasury intends to use powers in the European Union
(Withdrawal) Act (EUWA) to ensure that the UK continues to have a functioning
financial services regulatory regime in all scenarios.
1.9 The EUWA repeals the European
Communities Act 1972 and converts into UK domestic law the existing body of
directly applicable EU law (including EU Regulations). It also preserves UK
laws relating to EU membership – e.g. legislation implementing EU Directives.
This body of law is referred to as “retained EU law”.3 The
EUWA also gives ministers powers to prevent, remedy or mitigate any failure of
EU law to operate effectively, or any other deficiency in retained EU law,
through SIs. We sometimes refer to these contingency preparations for financial
services legislation as ‘onshoring’. These SIs are not intended to make policy
changes, other than to reflect the UK’s new position outside the EU, and to
smooth the transition to this situation. The scope of the power is drafted to
reflect this purpose and is subject to further restrictions, such as the
inability to use the power to impose or increase taxation, or establish a
public authority. 4 The power is also time-limited and falls away two years
after exit day. 5
1.10 HM Treasury also plans to
delegate powers to the UK’s financial services regulators to address deficiencies
in the regulators’ rulebooks arising as a result of exit, and to the EU Binding
Technical Standards (BTS) that will become part of UK law. Such sub-delegated
powers will be subject to broadly the same constraints as HM Treasury’s use of
the Act’s powers, as well as additional mechanisms to ensure robust HM Treasury
oversight. An SI to achieve this will be laid before Parliament now that the
EUWA has received Royal Assent.6 Further information on
regulatory changes to BTS and regulators’ rules for EU exit will be provided by
the financial services regulators in due course.7
1.11 The
government is continuing this work to ensure that the UK will have a
functioning legislative and regulatory framework in all scenarios. As part of
this, HM Treasury intends to legislate to provide the financial services
regulators with powers to introduce transitional measures that they could use
to phase in any onshoring changes.
1.12 This means
that firms do not need to prepare now to implement onshoring changes in the event
no deal is reached with the EU.
1.13 Firms should
continue to plan on the assumption that an implementation period will be in
place from 29 March 2019 – and, therefore, that they will be able to trade on
the same terms that they do now until December 2020. They will need to comply
with any new EU legislation that becomes applicable during this period.
1.14 HM Treasury,
working closely with the financial services regulators, has undertaken a
thorough review of EU and UK domestic financial services legislation to
identify deficiencies that will arise when the UK leaves the EU and existing EU
law is transferred to UK law. HM Treasury is drafting SIs to fix these
deficiencies and will begin laying these under the EUWA.
1.15 Wherever
practicable, our approach is that the same laws and rules that are currently in
place in the UK would continue to apply at the point of exit, providing
continuity and certainty as we leave the EU. However, some changes would be
required to reflect the UK’s new position outside the EU. These changes would
not take effect in 29 March 2019 if, as expected, we enter an implementation
period.
1.16 Examples of
deficiencies in financial services legislation include:
•
Functions that are currently carried out by EU authorities would
no longer apply to the UK (for example, supervision of trade repositories,
which HM Treasury proposes to transfer to the Financial Conduct Authority);
•
Provisions in retained EU law that would become redundant (for
example, references to European Consumer Credit Information and Member States);
•
Provisions that would be inconsistent with ensuring a functioning
regulatory framework – for example, requirements regarding automatic
recognition of an action by an EU body by the relevant UK body – where
alternative arrangements for cooperating with EU bodies would be more
appropriate;
•
Provisions that would lead to significant disruption for firms or
customers of firms, unless action is taken to avoid that disruption (for
example, to prevent the market disruption that would result from the sudden
inoperability of passporting rights);
•
Provisions requiring participation in EU institutions, bodies,
offices and agencies (for example, joint decision making in supervisory and
resolution colleges) which would no longer work after exit.
HM Treasury’s approach to fixing deficiencies
1.17 In the unlikely scenario that
the UK leaves the EU without a deal, the UK would be outside the EU’s framework
for financial services. The UK’s position in relation to the EU would be
determined by the default Member State and EU rules that apply to third
countries at the relevant time. The European Commission has confirmed that this
would be the case.8
1.18 In light of this, our approach
in this scenario cannot and does not rely on any new, specific arrangements
being in place between the UK and the EU. As a general principle, the UK would
also need to default to treating EU Member States largely as it does other
third countries, although there are instances where we would need to diverge
from this approach, including to provide for a smooth transition to the new
circumstances. The principles that would lead to deviations from this approach
are set out below.
1.19 In some areas, correcting
deficiencies to reflect this environment would be relatively straightforward.
The UK’s world-leading financial sector is overseen by HM Treasury and
underpinned by a strong legislative framework with world-class regulators (the
Bank of England/Prudential Regulation Authority and Financial Conduct
Authority). This means that the responsibilities of EU bodies could be
re-assigned efficiently and effectively, providing firms, funds and their
customers with confidence after exit.
1.20 In this scenario, EU financial
services firms operating in the UK would broadly become subject to the same
supervisory regime that the UK already applies to other third countries – a
regime that is shaped by the highly global, cross-border nature of financial services
and the UK's robust regulatory framework as set out in legislation, including
in the Financial Services and Markets Act 2000 (FSMA), the Banking Act 2009 and
the Bank of England Act 1998. This existing UK financial services legislative
framework provides powers for extensive cooperation with global regulatory
bodies. When the UK is no longer an EU Member State, and so the EU obligation
of reciprocal cooperation no longer applies, this existing framework could be
relied upon to ensure this important cooperation continues in this scenario.
1.21 HM Treasury recognises that in
some areas, given the complex and highly integrated nature of the EU financial
services system, deficiencies would not be adequately resolved by defaulting to
existing third country frameworks alone. In such cases, a different approach
might be needed to manage the transition to a stand-alone UK regime. HM
Treasury has identified several principles that would justify taking a
different approach:
•
Having a functioning legislative and regulatory regime in place,
in particular the regulators’ capability to fulfil their statutory objectives
as set out in FSMA;
•
Enabling regulators and firms to be ready – by minimising
disruption and avoiding material unintended consequences for the continuity of
service provision to UK customers, investors and the market;
•
Protecting the existing rights of UK consumers;
•
Ensuring financial stability.
1.22 For example, recognising the
need to provide for continuity and to allow time to prepare for a smooth
transition to the new regime, it would be appropriate for HM Treasury to
introduce a Temporary Permissions Regime (TPR), in line with the announcement
made in December 2017. To deal with the loss of their passporting rights on the
UK’s exit from the EU without a negotiated agreement, the TPR would allow EEA
firms to continue operating in the UK for a time-limited period after the UK
has left the EU. For those firms wishing to maintain their UK business on a
permanent basis, the regime would provide sufficient time to apply for full
authorisation from UK regulators. 9
1.23 In addition to the TPR, HM
Treasury intends to introduce further specific transitional regimes for
entities operating cross-border and outside of the passporting framework. This
is part of onshoring planning to maximise certainty and continuity for firms
and consumers. HM Treasury is aware that firms would need time to adjust to this
changed regulatory regime in the unlikely event it is needed, and therefore
intends to provide the financial services regulators with a general power to
phase in post-exit requirements, allowing flexibility for firms to transition
to a fully domestic UK regulatory framework.
Split of responsibilities between
HM Treasury and the financial services regulators
1.24 In leaving the EU without a
deal, many functions currently carried out at an EU level would cease to apply
to the UK and would need to be provided for in the UK’s regulatory regime. HM
Treasury’s onshoring work involves allocating these EU functions to the
appropriate UK bodies. In this scenario, HM Treasury proposes to follow the
model outlined in FSMA and allocate functions to UK regulators in a way which
is consistent with the responsibilities already conferred on them by
Parliament, thus providing certainty and continuity for firms.
1.25 Further information about how
HM Treasury proposes to allocate responsibilities between HM Treasury and the
financial services regulators in this scenario can be found in the draft
Financial Regulators’ Powers (Technical Standards) (Amendment etc.) (EU Exit)
Regulations 2018 and accompanying explanatory note, published in April 2018.10
1.26 Additionally, HM Treasury has
confirmed that in this scenario it intends to transfer supervisory powers to
the FCA to regulate credit ratings agencies and trade repositories currently
supervised at the European level by the European Securities and Markets
Authority (ESMA), and it intends to give functions and powers in relation to
non-UK central counterparties and non-UK central securities depositories, also
currently exercised by ESMA, to the Bank of England.11
1.27 When the regulators use the
delegated EUWA powers to correct deficiencies in BTS and their own rules, HM
Treasury will be required to approve the instruments which give effect to those
fixes. HM Treasury will ensure that those fixes are consistent with the powers
set out in the Act and are also consistent with changes that Parliament has
approved in onshored legislation.
1.28 After exit, HM Treasury
proposes that the regulators take on responsibility for maintaining BTS. Under
this proposal, when one of the regulators proposes a change to BTS, HM Treasury
will be required to approve the instrument that gives effect to the change. HM
Treasury may not approve a proposed change to BTS if it appeared to the
Treasury that the proposal would have implications for public funds or would
prejudice negotiations for an international agreement.
1.29 In addition to the role that HM
Treasury will play in approving instruments which correct deficiencies in BTS
and FSMA rules, or instruments which make changes to BTS after exit, the
regulators will be required to provide an annual report to Parliament setting
out how they have exercised any powers delegated to them under the EUWA. This
requirement for a report on EU Withdrawal Act delegated powers is set out in
Schedule 7, Part 3 of the Act.
Next steps
1.30 HM Treasury recognises the
importance of keeping stakeholders engaged on this work and ensuring that there
is an opportunity to contribute. Therefore, HM Treasury, along with the
financial services regulators, will engage stakeholders to discuss financial
services onshoring work.
1.31 HM Treasury intends to lay the
first financial services onshoring SIs soon. Among the first SIs laid will be
the SIs delivering the Temporary Permissions Regime, the Temporary Recognition
Regime for central counterparties and the SI sub-delegating the power to fix
deficiencies in BTS and regulator rulebooks to the financial services
regulators.
1.32 Further SIs fixing deficiencies
in EU legislation will be laid over the Autumn into early 2019. HM Treasury
plans to lay these SIs in groups, with some of the first to be laid in Autumn
covering significant files relating to prudential regulation and capital
markets. HM Treasury plans to publish drafts of these SIs and accompanying
explanatory information over the summer, ahead of laying, to give stakeholders
an opportunity to engage and familiarise themselves with the draft provisions.
1.33 The financial services
regulators will set out their own plans for stakeholder engagement on
amendments to their rulebooks and BTS in due course.
1.34 The immediate aim of this
onshoring work is to prepare for the unlikely scenario in which the UK leaves
the EU with no agreement and no implementation period. However, we expect much
of this onshoring work, augmented by the outcome of further negotiations with
the EU, will contribute towards the legislative framework needed to deliver a
smooth and orderly transition to the new regime that will be agreed as part of
the Future Economic Partnership. Further information on this will be made
available in due course.
Related References
1. Update
on the Regulatory Approach to the Approach to preparations for EU
withdrawal, Bank of England, March 2018. https://www.bankofengland.co.uk/news/2018/march/update-on-the-regulatory-approach-to-preparations-for-eu-withdrawal And FCA
statement on EU withdrawal following the March European Council, Financial
Conduct Authority, March 2018. https://www.fca.org.uk/news/statements/fca-statement-eu-withdrawal-following-march-european-council
2. Procedures
for the Approval and Implementation of EU Exit Agreements: Written statement -
HCWS342, Mr David Davis (Secretary of State for Exiting the European
Union), December 2017. https://www.parliament.uk/business/publications/written-questions-answers-statements/written-statement/Commons/2017-12-13/HCWS342/
3. Paragraph
23 of the Explanatory Notes on the European Union (Withdrawal) Act 2018
(c.16) for a definition of “retained EU law”, and Section 8 for an
explanation of the deficiency fixing power. http://www.legislation.gov.uk/ukpga/2018/16/pdfs/ukpgaen_20180016_en.pdf
4. Outlined
in Clause 8(7) of the European Union (Withdrawal) Act 2018 (c.16). http://www.legislation.gov.uk/ukpga/2018/16/pdfs/ukpga_20180016_en.pdf
5. Outlined
in Clause 8(8) of the European Union (Withdrawal) Act 2018
(c.16). http://www.legislation.gov.uk/ukpga/2018/16/pdfs/ukpga_20180016_en.pdf
6. Draft
Statutory Instruments: 2018 No. Exiting the European Union, Financial Services,
Financial Regulators’ Powers (Technical Standards) (Amendment etc.) (EU Exit)
Regulations 2018. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/701834/draft_Financial_Regulators__Powers__Technical_Standards__Regulations.pdf And
see Covering note on the Financial Regulators’ Powers (Technical Standards)
(Amendment etc.) (EU Exit) Regulations 2018. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/700713/Covering_note_for_draft_Financial_Technical_Standards_SI.pdf
7. FCA
Role Preparing for Brexit, Financial Conduct Authority, June 2018. https://www.fca.org.uk/news/statements/fca-role-preparing-for-brexit Bank
of England’s approach to financial services under the EU Withdrawal Act,
June 2018. https://www.bankofengland.co.uk/news/2018/june/boes-approach-to-financial-services-legislation-under-the-eu-withdrawal-act
8. Withdrawal of
the United Kingdom and EU rules in the field of banking and finance, Directorate‑General
for Financial Stability, Financial Services and Capital Markets Union (European
Commission), February 2018. https://ec.europa.eu/info/publications/180208-notices-stakeholders-withdrawal-uk-banking-and-finance_en
9. Financial
Services Update: Written statement - HCWS382, Mr Philip Hammond (The
Chancellor of the Exchequer), December 2017. https://www.parliament.uk/business/publications/written-questions-answers-statements/written-statement/Commons/2017-12-20/HCWS382/
10. Draft
Statutory Instruments: 2018 No. Exiting the European Union, Financial Services,
Financial Regulators’ Powers (Technical Standards) (Amendment etc.) (EU Exit)
Regulations 2018. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/701834/draft_Financial_Regulators__Powers__Technical_Standards__Regulations.pdf And
see Covering note on the Financial Regulators’ Powers (Technical
Standards) (Amendment etc.) (EU Exit) Regulations 2018. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/700713/Covering_note_for_draft_Financial_Technical_Standards_SI.pdf
11. 11Financial
Services Update: Written statement-HCWS382, Mr Philip Hammond
(The Chancellor of the Exchequer), December 2017. https://www.parliament.uk/business/publications/written-questions-answers-statements/written-statement/Commons/2017-12-20/HCWS382/
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