UK regulators lay out their plans for amending financial services legislation

On 27 June 2018 in the wake of the European Union (Withdrawal) Act 2018 (EUWA) receiving Royal Assent, HM Treasury published a statement describing how the UK intends to approach amending financial services legislation to deal with the issues thrown up by the Brexit process. There were two key themes to their approach:

1. Transition period: planning is to proceed on the basis that the transition period, or what will be known from now on as the "implementation period", agreed in principle between the UK and the EU earlier this year, will be in place between 29 March 2019 and 31 December 2020 (HM Treasury's statement says the UK government has "every confidence" that a deal will be reached and the implementation period will be in place); and
2. No deal: (notwithstanding the above!) planning is also to proceed on the basis that the UK and the EU fail to reach an agreement on the terms of the UK's withdrawal from the EU with the result that the transition or implementation period never comes into effect when the UK exits the EU on 29 March 2019 (described as the "no deal" scenario).

Shortly after HM Treasury's announcement, a suite of regulators followed suit. The Bank of England (BOE), Financial Conduct Authority (FCA) and the Payment Systems Regulator all made similar announcements within 24 hours. (See BoE announcement, PSR announcement, and FCA announcement.)

Clearly, no regulator or government department is willing to place all their chips on a period being put in place (nor could they, given the existing political and legal uncertainty that hangs over it). But it is very interesting to see HM Treasury's plans for a Transitional Permissions Regime, which will come as a relief to some European banks and branches operating in the UK and who can therefore rely on this announcement as a way to mitigate (or at least postpone) the risks associated with the potential of a hard Brexit on 29 March 2019. UK firms operating in Europe do not quite have that luxury.

The "transition" or "implementation" period

The UK and the EU have notionally agreed the terms of a transition period that will start on 29 March 2019 and last until 31 December 2020. The UK government refers to this as an "implementation period" because it is politically important to characterise it as a period during which the new arrangements (yet to be agreed) between the UK and the EU can be agreed and implemented rather than a period of transition from being a full member state to whatever the new arrangement is with the implication that the UK will still retain many of the attributes of a full member state during this transition.

The agreement between the UK and the EU on this implementation period is to form part of the overall agreement on the terms of the UK's withdrawal (the Withdrawal Agreement), including such thorny issues as the Irish border. As such, the implementation period will only come into effect if the entire Withdrawal Agreement is agreed and implemented.

Under the terms of the agreement on the implementation period, 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 during the implementation period. This will mean that access to each other’s markets will continue on current terms until 31 December 2020 and any new EU legislation that becomes applicable in member states during the implementation period will equally become applicable in the UK.

No deal

If the UK and the EU fail to reach an agreement on the terms of the UK's withdrawal from the EU with the result that the implementation period never comes into effect then it is likely that on 29 March 2019 the UK will exit the EU and simply become a "third country" as far as EU legislation is concerned.
To prepare for this eventuality, HM Treasury intends to use powers in the EUWA to ensure that the UK continues to have a functioning financial services regulatory regime.

The EUWA has three major functions in this regard:

1. it repeals the European Communities Act 1972;
2. it converts into UK domestic law the existing body of directly applicable EU law (this body of law is referred to as "retained EU law"); and
3. it gives ministers powers (so-called "Henry VIII powers") to prevent, remedy or mitigate any failure of EU law to operate effectively, or any other deficiency in retained EU law, through statutory instruments (SIs).

HM Treasury refers to the process described in 2 and 3 above as "onshoring". Therefore, 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.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. An SI to achieve this will be laid before Parliament now that the EUWA has received Royal Assent. 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.

HM Treasury asserts this means that firms do not need to prepare now to implement onshoring changes in the event no deal is reached with the EU. [Note, clearly firms will need to prepare for the commercial consequences a loss of passport may bring.] Instead, 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 – and they will need to comply with any new EU legislation that becomes applicable during this period.

In a no deal scenario HM Treasury envisages that the responsibilities of EU bodies could be re-assigned efficiently and effectively to UK authorities (the BoE/Prudential Regulation Authority and FCA). HM Treasury also recognises it would be appropriate to introduce what it calls a Temporary Permissions Regime (TPR) which would:

• allow EEA firms which have lost their passporting rights on the UK’s exit from the EU to continue operating in the UK for a time-limited period after the UK has left the EU; and
• provide those firms wishing to maintain their UK business on a permanent basis with sufficient time to apply for full authorisation from UK regulators.

Next steps

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. 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.

The financial services regulators (the BoE/Prudential Regulation Authority and FCA) will set out their own plans for stakeholder engagement on amendments to their rulebooks and BTS in due course.

HM Treasury says the immediate aim of this onshoring work is to prepare for the scenario in which the UK leaves the EU with no agreement and no implementation period. But it expects much of this onshoring work will contribute towards the legislative framework which the UK government aspires to in its negotiations with the EU.

The Bank of England’s approach to financial services legislation under the European Union (Withdrawal) Act

This autumn, the BoE as regulator, intends to consult, in co-ordination with the FCA when appropriate, on proposed changes to onshored BTS. They plan to do this following HMT’s publication in draft, or laying before Parliament, of SIs relating to most of their regulatory remits. The changes would largely only come into force on 29 March 2019 in the eventuality that the implementation period is not put in place i.e. there is a 'no deal Brexit'.

Like HM Treasury, the BoE has made it clear that it does not expect firms to prepare now to implement these changes, instead relying on the promise of transitional relief in the event of a no deal Brexit.

PSR’s approach to financial services legislation under the European Union (Withdrawal) Act

HMT's plans to allocate responsibility to the different financial regulators and task them with amending EU Binding Technical Standards (BTS) really only relates to the BTS made under the Interchange Fee Regulation for the PSR. These powers are linked to their role as the main competent authority for the Interchange Fee Regulation in the UK. The PSR intend to consult on proposed changes to the BTS in this respect.

The FCA's role in preparing for Brexit

The FCA has been tasked with amending and maintaining EU binding BTS and it has announced that it will follow the same approach to onshoring as HM Treasury, whereby it will not rely on any new, specific arrangements being in place between the UK and the EU after exit and, as a general rule, EU member states will be treated as third (non-EU) countries. The FCA may, however, deviate from this general approach in cases where this is necessary to ensure a smooth transition to a new regime or to otherwise support its strategic and operational objectives.

In parallel to financial services onshoring SIs, which are expected to be laid down in Parliament later in the year, the FCA, following consultation, will make amendments to its Handbook and to onshored BTS. The Handbook amendments will largely be confined to those required to ensure its continued functionality after exit and to reflect any legislative changes made by the Government.