Many of us, particularly those of us lucky enough to have been away over the summer, will now be experiencing the financial services professional's equivalent of the dreaded "back to school" feeling. Only for us, it's a case of "back to Brexit". Judging by the amount of new material they have published, neither the UK nor the EU authorities have taken much holiday. So to ease our "back to Brexit" blues, we've brought together the key publications in one note together with some summary commentary.
A compendium of the various regulatory announcements is also available in our blog “Financial Services Brexit developments over the summer: a detailed assessment”.
The UK published its White Paper on the future relationship with the EU post Brexit. It later detailed its position further in a presentation on the “Framework for the UK-EU partnership” in the specific area of financial services. The UK government also published a technical notice to inform personal and business customers of financial services firms and funds, and financial services firms, funds and financial market infrastructures (FMIs), on how to prepare for a potential no-deal scenario in March 2019. Michel Barnier insisted on the importance for each side of keeping their autonomy regarding the regulatory framework and equivalence decisions, which the UK has also acknowledged, but he also highlighted his confidence around reaching an agreement before the end of the year. In an interview with the Financial Times, Valdis Dombrovkis warned that Brussels will adopt a strict stance on Britain’s rights of access to EU markets after Brexit. In a recent speech in Berlin, Michel Barnier is reported to have announced that he was close to offering the UK a partnership “such as [had] never been with any other third country”.
In the EU
The Commission published a Communication on preparing for Brexit. Other major EU publications came from the European Central Bank (ECB), as the latter published: (i) an article on the “Brexit Countdown”; (ii) its supervisory expectations for booking models; and (iii) a revision of its Asset Quality Review (AQR) methodology.
In the UK
HM Treasury (HMT) published a draft Statutory Instrument (SI) which, subject to Parliamentary approval, will create a Temporary Permissions Regime (TPR) for EU firms operating in the UK after exit day in March 2019. The Financial Conduct Authority (FCA) later clarified its approach to the TPR, including the governance and funding requirements for firms in the regime. The Bank of England (BoE) also published a press release on the topic, presenting the details of the regime for firms as well as the temporary recognition regime for non-UK CCPs. Five other draft SIs were published, including one on central counterparties, one on building societies, one on the Short Selling Regulation, one on Deposit Protection, and one on the Capital Requirements Regulation (CRR). Finally, Andrew Bailey, Chief Executive Officer of the FCA, sent a Dear CEO letter to banks indicating that the FCA is “open to a broad range of legal entity structure or booking models”, including the use of back-to-back and remote booking.
The publications by EU and UK authorities over the summer focused on clarifying their respective positions, both around how firms should prepare for Brexit, and what needs to be done to ensure firms can continue operating in the EU and the UK after Brexit day.
In a draft SI, HMT confirmed its intention to provide flexibility to inbound firms by clarifying the regulatory expectations around the TPR. The extension of the TPR to a period of three years will help firms spread out their authorisation applications while avoiding any disruption to their activities after Brexit day. It will also allow UK regulators to manage the volume of authorisations in a smoother way.
The EU has adopted a more cautious stance. Both the ECB and the Commission highlighted that firms should prepare for all contingencies, including the absence of a ratified Withdrawal Agreement in March 2019, and that they should not expect public sector solutions to help them in their preparations, including on contract continuity. Additionally, the ECB’s supervisory expectations on booking models reiterated that firms should ensure their EEA entities are not empty shells, but have adequate capabilities, risk management processes, systems and controls in place to comply with the regulatory requirements.
The ECB’s supervisory expectations on booking models repeated some familiar material relevant to the Brexit context, including a proportional build-out and the implementation of a booking model policy and controls. But firms should also take into account the new elements mentioned, including: (i) the approval by the EU entity management board of the implementation plan to take into account these supervisory expectations; (ii) a policy on marketing and controls; (iii) a crisis management plan; and (iv) the requirement for banks already under the Single Supervisory Mechanism (SSM) to provide the same plans.
Overall, two trends have become even more apparent in the course of the summer. First, although it is now common ground that the future framework will be based on equivalence, some outstanding questions remain, particularly regarding: (i) whether the UK can secure equivalence for MiFIR investment services and retain most of its capital markets activities; (ii) whether there will be short-term changes to national market access regimes; and (iii) what the practical impact of the ECB’s supervisory expectations on booking models will be. Second, no progress appears to have been made on key cliff edge risks, notably issues around derivative contract continuity and personal data transfer. The Technical Working Group between the BoE and the ECB, formed to address those issues, has not made any statements since it was set up. The EU authorities' stance (in public, at least) remains that these are issues which the industry can sort for itself without the need for legislative interventions. Against this background, UK-based firms seeking to ensure access to the EU after exit day have no choice but to continue planning on their ”maximum change” basis, assuming a hard Brexit without any transition period. Some may need to think more carefully about the impact of there being no public sector mitigating actions for certain cliff edge risks, including contract continuity and data transfer and protection.
The next major milestone should be the EU summit on 18 and 19 October. The summit is the target date for EU and UK leaders to agree on a Withdrawal Agreement before submitting the latter for ratification by both parties. The Withdrawal Agreement should also be accompanied by a separate political declaration, setting out the broad terms of the future relationship between the EU and the UK after March 2019. However, in a press conference, Michel Barnier mentioned that the agreement on the Withdrawal Agreement and the political declaration may be delayed to the beginning of November, but it should be reached before the end of the year.
The FCA and PRA are also expected to consult on amending their rules in order to introduce the TPR in the autumn.
Additional technical notices, including one on data sharing and transfers after Brexit, will be published by the UK government later in September to set out further details of what businesses and citizens should do to prepare for a no-deal scenario.