Brexit update for financial services firms - week ending 9th November 2018
The week in outline:
In the financial services (FS) sector, the flow of publications on ‘no deal’ preparations continues apace (see Documents 1 to 5 below and most of the additional publications in section 2). The EU is taking a very different approach to that of the UK. EU policy is designed to put maximum pressure on the UK in the on-going negotiations and to maximise the migration of FS business from the UK to the EU, by the lack of no-deal transitionary relief for UK firms. This is tempered, it seems, only by relief which EU firms require. In contrast the UK is promulgating a broad range of temporary regulatory regimes to provide transitional relief for EEA-30 firms, to remove the cliff-edge effects of a no-deal. Our database of SIs under section 8 of the European Union (Withdrawal) Act 2018 (EUWA) (NtA[1] SIs) now has a separate section which sets out 8 different temporary regimes (involving temporary permissions, temporary recognitions, temporary registrations and temporary designations) in NtA SIs (see the database here). These include the temporary SFD designation regime as explained in Document 4 below (see also our report on settlement finality in our update for the week ending 17 August 2018.
EIOPA published a press release update (following its December 2017 opinion on service continuity in insurance) (see Document 3 below). It says that there are 124 UK and Gibraltar insurers (with cross-border policies) with no or inadequate contingency plans for a no deal Brexit. It urges these insurers to take action immediately to ensure service continuity in the event of a no deal Brexit. Pressure is being applied by the lack of any EU equivalent to the UK’s temporary permission regime for EEA-30 insurers. EIOPA reports that the largest UK insurers have taken action and over 75% of cross-border insurance contracts are no longer at risk (only 9.1 million EEA-30 policyholders are still at risk compared to the 38 million previously identified by EIOPA). The UK courts have recently taken a sympathetic approach[2]when dealing with the approval of Part VII transfersby UK groups,madeas a precaution against a no deal scenario,to EU-27 entities.
ESMA published proposals (see Document 1 below) for a temporary waiver of the central clearing obligation (for a no-deal scenario) to assist EU-27/EEA-30 counterparties to uncleared OTC contracts with UK counterparties. A UK counterparty, such as a bank, will lose its EU/EEA authorisation in a no-deal Brexit. If action/servicing is subsequently required, this may be impossible for the UK bank without authorisation. The contract may, therefore, need to be novated to an EU-27/EEA-30 bank/counterparty. This, however, may trigger an obligation to centrally clear the contract with a CCP which would increase costs. The temporary waiver that ESMA is proposing would avoid this problem. This issue would not arise at exit on 29th March 2019 if the EU were to adopt an equivalent to the UK’s broad TPR (Temporary Permission Regime) as the UK bank above would not lose its EU-27/EEA-30 authorisation at that point. The ESMA approach seems to confirm that the EU has no intention of introducing an equivalent to the UK’S TPR for FS firms.
ESMA has also published a statement on credit rating agencies (CRA) and trade repositories (TR) (see Document 2 below). The UK is already promulgating NtAs with transitional measures to assist the migration of both CRAs and TRs (see our NtA database here). These both include a Conversion Regime and Temporary Registration Regime. ESMA, however, has been pressing for UK CRAs and TRs to prepare for a no deal scenario without similar relief from the EU side. It reports good progress in these preparations i.e. in relocation applications for registration of (or use of already registered) EU-27 entities. ESMA does, however, confirm the intention to agree an MoU with FCA prior to 29th March 2019 - “…. the presence of an MoU is a precondition to allow registered CRAs to endorse - under certain circumstances - ratings issued from the UK and in turn to allow the use of those ratings for regulatory purposes in the EU27.” Regarding TRs ESMA said: “EU counterparties and CCPs must report details of derivative contracts to a registered EU-established TR or a recognised third-country TR. All counterparties must ensure that this requirement continues to be fulfilled. ESMA invites market participants to contact their TR to verify whether continuity of service will be ensured after Brexit.”
1. ESMA: EMIR Clearing Rregulation in the Context of a No-Deal BREXIT
ESMA has published a final report with draft regulatory technical standards that proposes to amend the three Delegated Regulations on the clearing obligation under EMIR in the case of a no-deal Brexit. The draft standards propose to introduce a limited exemption in order to facilitate the novation of certain non-centrally cleared OTC derivative contracts to EU counterparties during a specific time-window. The full report can be accessed here.
“In the context of the on-going withdrawal negotiations between the EU and the UK, and to address the situation where a UK counterparty may no longer be able to provide certain services across the EU, counterparties in the EU may want to novate their non-centrally cleared OTC derivative contracts by replacing the UK counterparty with an EU counterparty. However, by doing this, they may trigger the clearing obligation for these contracts, therefore facing costs that were not accounted for when the contract was originally entered into.
The draft RTS allows UK counterparties to be replaced with EU ones without triggering the clearing obligation. This limited exemption would ensure a level playing field between EU counterparties and the preservation of the regulatory and economic conditions under which the contracts where originally entered into.
The window for the novation of non-centrally cleared OTC derivative contracts which fall under the scope of this amending regulation would be open for twelve months following the withdrawal of the UK from the EU. Counterparties can however start repapering their contracts ahead of the application date, making the novation conditional upon a no-deal Brexit, given the conditional application date of this amending regulation.”
2. ESMA: Credit Rating Agencies and Trade Repositories – Preparing for a No-Deal BREXIT
ESMA has published a statement intended to raise market participants’ awareness on the readiness of credit rating agencies and trade repositories for the possibility of a no-deal Brexit. The full statement can be accessed here.
“Derivatives subject to the reporting obligation under EMIR1 must be reported to a registered EU-established TR or a recognised third-country TR. Similarly, CRAs need to have a legal entity registered in the EU and supervised by ESMA, in order for their ratings to be used for regulatory purposes in the EU. In a no-deal Brexit scenario, TRs and CRAs established in the UK will lose their EU registration as of the UK’s withdrawal date.
[…]
Given the cross border nature of both industries, after Brexit, ESMA intends to have in place with the UK Financial Conduct Authority (FCA) an MoU in order to allow information exchange for effective supervision and enforcement. With specific reference to the CRA industry, the presence of an MoU is a precondition to allow registered CRAs to endorse - under certain circumstances - ratings issued from the UK and in turn to allow the use of those ratings for regulatory purposes in the EU27. Taking the wider negotiations between the EU and UK into account, ESMA plans to start negotiations with the UK FCA with the intention to have MoUs in place sufficiently in time before the end of March 2019.
[…]
EU counterparties and CCPs must report details of derivative contracts to a registered EU-established TR or a recognised third-country TR. All counterparties must ensure that this requirement continues to be fulfilled. ESMA invites market participants to contact their TR to verify whether continuity of service will be ensured after Brexit.
ESMA is preparing for the eventuality that some counterparties may need to request their existing UK TR to port their data to a EU27 TR. Ensuring data quality in the transfer of EMIR data from one TR to another is key.
[…]
The majority of the UK CRAs and TRs have expressed their intention to continue providing their services in the EU27 after Brexit and have implemented subsequent actions, such as: i) applied to register a new legal entity in the EU27; ii) notified ESMA of material changes concerning the organisation of the entities already registered in the EU27 (e.g. strengthening the presence of staff in the EU27).”
3. EIOPA: BREXIT — Contingency Planning of Insurance Undertakings
EIOPA's press release states that it has found that 124 insurance undertakings from the UK and Gibraltar with cross-border business in EEA jurisdictions have no or insufficient contingency plans in place to ensure service continuity in the case of a no-deal Brexit. EIOPA notes that it is working with the national competent authorities to address the residual risk. The press release can be accessed here.
“The insurers with the largest cross-border business in the EEA30 countries have taken action and are implementing contingency measures.
[…]
In case of a withdrawal without an agreement, 9.1 million EEA30 policyholders might face uncertainty and delays in receiving payments. This is significantly down from the total 38 million EEA30 policyholders with a cross-border contract, which shows the extent of action by UK insurers with large cross-border business.
[…]
The majority of the business (with insurance liabilities of EUR 5.4bn) relates to a handful of insurers in the United Kingdom. The remaining business has mainly low value and short-tail liabilities. Overall, 75% of the contracts concerned belong to portfolios with average written premiums of less than EUR 100 per year.”
4. Bank of England: Follow-up letter to EU Systems designated under the Settlement Finality Directive
Following the UK’s withdrawal from the EU, UK settlement finality protection will be open to any system, regardless of the system’s governing law and the place of establishment of its participants. As is currently the case, the Bank will be responsible for the designation of systems. The full letter can be accessed here.
“The requirements that will be placed on all systems, and the process that the Bank will follow, will be broadly similar to those applying today in respect of systems governed by UK law. These include that the system meets the requirements set out in the Schedule of the UK Settlement Finality Regulations relating to: arrangements for monitoring compliance with its rules; default arrangements; rules which specify when transfer orders have been entered into the system and can no longer be revoked; and ensuring the system is able and willing to cooperate with the Bank.
The requirements related to the application are set out in Part II and the Schedule of the UK Settlement Finality Regulations as amended by the legislation published last week.
[…]
The temporary SFD designation regime will enable EU systems to continue to benefit from UK SFD protection until the designation process is complete. It is open to those EU systems that are designated under the SFD by an EEA state immediately before the UK withdraws from the EU. The legislation will specify that any EU systems that wish to continue to benefit from UK settlement finality protection must notify the Bank in advance of the UK’s withdrawal from the EU.
[…]
To inform market participants, the Bank intends to publish on the Bank website the names of all EU systems that have given an indication of their intention to enter into the temporary SFD designation regime, prior to the legislation coming into force. When giving an indication of their intention to enter into the temporary designation regime, each system will be asked for consent for this publication.
[…]
EU systems may benefit from continued UK settlement finality protection for three years from the point at which the UK withdraws from the EU, to allow for ‘steady state’ designation to be granted. However, an EU system must apply for ‘steady state’ designation within 6 months from the point at which the UK withdraws from the EU. Furthermore, UK settlement finality protection will cease where a system is no longer designated under the SFD by an EEA state. The Bank will not charge a fee in respect of the temporary SFD designation regime.
[…]
EU systems are invited to fill in the online survey linked to in the cover email to:
- Provide the full name of the system, as used in the ESMA list of Designated Payment and Securities Settlement Systems, for which temporary SFD designation is sought;
- Provide a nominated primary contact point, including job title and contact details (address, phone number and email address), at the system;
- Indicate whether they give consent for the publication of the name of the relevant system or systems on the Bank website;
- Confirm that the individual submitting the indication has the appropriate authority to do so.
The Bank will update you when the legislation has come into force. Where a notification is made after this point, it should follow the same format as the above.
Systems that have given an indication of their intention to enter into the temporary SFD designation regime must inform the Bank as soon as possible if they are no longer designated under the SFD by an EEA state either immediately before or after the UK withdraws from the EU.”
5. Draft Bank of England (Amendment) (EU Exit) Regulations 2018
This SI amends the Bank of England Act 1998, the Financial Services Act 2012, the Cash Ratio Deposits (Eligible Liabilities) Order 1998, the Scottish and Northern Ireland Banknote Regulations 2009, the Bank of England Act 1998 (Macro-prudential Measures) Order 2013, the Bank of England Act 1998 (Macro-prudential Measures) (No 2) Order 2015 and the Bank of England Act 1998 (Macro-prudential Measures) Order 2016 in order to address failures of retained EU law to operate effectively and other deficiencies arising from Brexit. An explanatory note has been published alongside the SI Draft Competition (Amendment etc.) (EU Exit) Regulations 2019. The draft SI can be accessed here and the explanatory information can be accessed here.
“This instrument will amend certain provisions in the Bank of England Act 1998, the Financial Services Act 2012, and related secondary legislation. Amendments introduced through this instrument make only technical changes to existing legislation to ensure that it continues to operate effectively once the UK leaves the EU.
To reflect the UK’s new status when the UK leaves the EU, information sharing and cooperation obligations in respect of EU authorities will be removed. It is more appropriate for UK authorities to rely on the existing domestic framework for cooperation and information sharing with non-EU countries, which allows UK authorities to cooperate with relevant authorities outside the UK on a discretionary basis.”
Other publications from the RegZone Brexit news feed
HoC: Brexit - the exit bill
HoC has published a revised edition of this library briefing. The full briefing paper can be accessed here.
Draft Takeovers (Amendment) (EU Exit) Regulations 2019
A new draft of this SI has been published and can be accessed here.
HoC European Scrutiny Committee: 42nd Report of Session 2017-19
Sections 4 and 5 of the report consider prudential requirements, debt management and collateral recovery in relation to non-performing loans and OLAF (the EU's EU anti-fraud body) respectively and detail the latest ministerial responses to the Committee’s specific concerns. These matters are still under scrutiny by the Committee. The full report can be accessed here.
Draft Trade Repositories (Amendment and Transitional Provision) (EU Exit) Regulations 2018
This SI has been laid before Parliament and can be accessed here.
Draft Payment Accounts (Amendment) (EU Exit) Regulations 2018
This SI has been laid before Parliament and can be accessed here.
The EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018/1149
The Regulations repeal EEA Passport Rights under Schedule 3 to FSMA and Treaty Rights under Schedule 4 to that Act and make transitional provision so that a person who ceases to be authorised to carry on a regulated activity in the UK by virtue of an EEA Passport Right or a Treaty Right may continue, for a limited time, to carry on such an activity. (Made: 6 November 2018) The full Si can be accessed here.
HoC: EU state aid rules and WTO subsidies agreement
This HoC library briefing looks at the rules around state aid and subsidies and what might change post-Brexit. The full briefing paper can be accessed here.
FCA: Board minutes
FCA has published the minutes of its 26/27 September 2018 board meeting. Topics include: PPI; access to FOS; FCA’s financial penalty policy; crypto-assets; FCA's financial crime policy and Brexit.
The full minutes can be accessed here.
HoC: Brexit timeline: events leading to the UK’s exit from the EU
An updated HoC library briefing has been published and can be accessed here.
FCA: Speech by Nausicaa Delfas: Maintaining market confidence: an update on Brexit
Text of this speech given on 5 November 2018 follows, in which Nausicaa Delfas discusses FCA's preparations in relation to Brexit and notes preparations for firms in the event of a no-deal Brexit. She notes: "although progress has been made, risks remain, particularly in areas where actions would be needed by both the UK and EU authorities, such as contractual continuity, data adequacy and clearing. The time to resolve these issues and provide certainty to markets is now, and I hope our EU counterparts will work with us to prepare to manage these risks". The full speech can be accessed here.
PRA: Temporary permission and variation: notification before exit day
Further to the recent passporting SI, PRA has published this Direction. The direction can be accessed here.
CMS RegZone publishes weekly updates (available via email, on-line and via Twitter) on Brexit developments for financial services firms. These provide analysis and commentary on significant developments during the week in question. A daily digest of Brexit news (without analysis or commentary) is also available by email here and online via the RZ news wizard here (both of these can be filtered using the Brexit topic). Links to publications are contained in each update; publications released before the updates commenced in April 2018 can be found in a bibliography here. CMS RegZone publication ‘Where we stand’ provides an overview of the current position in a single report; this is updated regularly to take account of the key developments from the weekly updates.
[1] Nationalising the acquis
[2] Re AIG Europe Ltd and other companies [2018] EWHC 2818 (Ch) and Re Barclays Bank Plc [2018] EWHC 2868 (Ch)
