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The UK’s post-Brexit framework for financial services regulation
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.
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