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Fascinating statements from the UK government released this
week that look to really set the theme for financial services
regulation in the UK after the Brexit transitional period is over
and the UK is no longer bound by EU rules. Although the UK legally
left the EU on 31 January 2020 (ironically the date of the first
confirmed UK cases of coronavirus), it agreed to abide by EU law
until the end of 2020 including new regulation, on which it had no
say. During the Brexit negotiations this year, regulatory alignment
and financial services have been a key point, with the EU wanting
to keep the UK subject to its rules and the UK wanting
autonomy.
Four years to the day after the referendum, the UK has now set
out some of its intentions for divergence from the start of next
year, covering both prudential and capital markets. The UK
Chancellor of the Exchequer, Rishi Sunak stated that rules designed
as a compromise for 28 countries cannot be expected in every
respect to be the right approach for a large and complex
international financial sector such as the UK.
This is aggressive given the parlous state of the Brexit
negotiation. This week's announcement reduces further the chances
of the EU finding the UK equivalent in a number of areas where the
UK has been explicit on the intent to deviate from the EU going
forward. I also note with interest the return of 'competitiveness'
to the regulatory agenda, something that was put aside after the
financial crisis.
I expect the UK wants to state very clearly to the EU it will
legislate in its own interests and not let the EU dictate the
timing of UK regulation. On the fourth anniversary of the
referendum, this feels like the UK getting on with it (at least for
financial services).
The announcement this week included:
1. Prudential Requirements
The UK is using the Financial Services Bill to legislate to
enable the implementation of a new prudential regime for investment
firms and to update the regulation of credit institutions,
including the implementation of the international Basel III
standards. The intention is to introduce updated prudential
standards in a flexible and proportionate manner by delegating
responsibility for firm requirements to the Prudential Regulation
Authority (PRA) or the Financial Conduct Authority (FCA) subject to
an enhanced accountability framework to ensure that the regulators
have regard to competitiveness and equivalence when making rules
for these regimes.
The UK will introduce the new Investment Firms
Prudential Regime (IFPR) and updated rules for credit
institutions but the PRA does not intend to require PRA-designated
investment firms to re-authorise as credit institutions, unlike the
EU regime. The UK also does not intend to require FCA-regulated
investment firms to comply with the requirements of CRDV in the
period until the new IFPR applies. (The FCA published a
Discussion Paper on a new prudential regime for MiFID
firms and HM Treasury will consult on the
transposition of CRDV next month).
The UK does not intend to transpose the requirements in
BRRD 2 that do not need to be complied with by
firms until after the end of the Transition Period, in particular
Article 1(17) which revises the framework for MREL requirements
across the EU. (HM Treasury published a consultation on the
transposition of BRRD2.)
The UK plans to bring forward a review of certain features of
Solvency II to ensure that it is properly tailored
to take account of the structural features of the UK insurance
sector, covering but not limited to, the risk margin, the matching
adjustment, the operation of internal models and reporting
requirements for insurers. The UK will publish a Call for Evidence
in Autumn 2020.
2. Capital Markets
The UK will consider the future approach to the UK's
settlement discipline framework, given the importance of
ensuring that regulation facilitates the settlement of market
transactions in a timely manner while sustaining market liquidity
and efficiency. The UK will not implement Central
Securities Depositories Regulation (CSDR) rules due to
apply in February 2021. UK firms will continue to apply the
existing industry-led framework.
The UK will not incorporate into UK law the reporting obligation
of the Securities Financing Transactions Regulation
(SFTR)for non-financial counterparties
(NFCs), which is due to apply in the EU from January 2021.
Given that systemically important NFC trading activity will be
captured sufficiently through the other reporting obligations that
are due to apply to financial counterparties, it is felt
appropriate for the UK not to impose this further obligation on UK
firms.
HM Treasury will set out further detail on upcoming legislation
in due course, which will include amendments to the:
Benchmarks Regulation to ensure continued
market access to third country benchmarks until
end-2025. HM Treasury will publish a policy
statement in July 2020. There are also enhanced powers for
regulators for LIBOR transition to RFRs.
Market Abuse Regulation (MAR)
to confirm and clarify that both issuers and those acting on their
behalf must maintain their own insider lists and to change the
timeline issuers have to comply with when disclosing certain
transaction undertaken by their senior managers;
PRIIPs to address potential risks of consumer
harm. HMT will publish a policy statement July 2020; and
European Market Infrastructure Regulation
(REFIT) to improve trade repository data and
ensure that smaller firms are able to access
clearing on fair and reasonable terms.
Posted 25 June 2020 by David Cook, Executive Director, Regulatory Affairs
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