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Following on from the FCA’s consultation papers on Brexit which were published earlier this month, the Bank of England (BoE) has now issued a package of communications setting out proposed changes to its rules and some of the binding technical standards that have been allocated to it under the Financial Regulators’ Powers (Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018.
The communications are relevant to all firms authorised and regulated by the PRA, EEA firms undertaking cross-border activities into the UK, UK financial market infrastructures (FMIs) regulated by the BoE, and non-UK central counterparties (CCPs) and non-UK central securities depositories (CSDs) providing cross-border services into the UK.
The package of communications comprise of
The BoE also reports that it has updated its website by adding a single webpage that brings together previous communications on Brexit. This includes information for firms on the temporary permissions regime and information on the process for incoming FMIs.
The communications are an important component of the UK’s contingency planning for a so called "hard Brexit" where the Withdrawal Agreement (containing an implementation period) is not ratified by 11pm on March 29, 2019 (Exit day).
The Dear CEO letter from Sam Woods contains messages for both PRA authorised firms and EEA firms that currently passport into the UK.
In terms of PRA authorised firms the key messages are
In relation to EEA firms that currently passport into the UK, the Dear CEO letter reminds them that in the event the Withdrawal Agreement is ratified, PRA authorisation will only be needed by the end of the implementation period. If the Withdrawal Agreement is not ratified, EEA firms will need to make the relevant notification and use the temporary permissions regime.
Finally, in terms of contract continuity the Dear CEO letter states that the PRA notes “the UK Government’s commitment, in December 2017, to lay additional legislation, if necessary, to ensure contractual obligations not covered by the temporary permissions regime can continue to be met.”
The Dear CEO letter to non-UK CSDs deals with three questions
The Dear CEO letter states that UK domestic law requirements for recognition of non-UK CSDs will “in essence” be the same as the current requirements for recognition of third country CSDs in the EU under Article 25 of the Central Securities Depositories Regulation (CSDR). The transitional regime will also be similar to the one described in article 69 of the CSDR.
The transitional regime will enable non-UK CSDs to continue to provide CSD services in the UK until the recognition process is complete. Non-UK CSDs that wish to continue to provide CSD services in the UK after Exit day are encouraged to indicate their intent to use the transitional regime now, prior to legislation coming into force. If they reply to the Dear CEO letter saying they wish to use the transitional regime, then the BoE will, upon the legislation coming into force and subject to its terms, treat this as a notification and confirm that it has done so. A non-UK CSD can rescind the notification at any point by notifying the BoE.
Non-UK CSDs may use the transitional regime until the recognition process is complete. However, a non-UK CSD must apply for recognition within six months of a positive equivalence decision being made by the BoE of the jurisdiction in which the CSD is established.
Non-UK CSDs are invited to write to the BoE indicating among other things
The Dear CEO letter adds that the BoE will publish on its website the names of all non-UK CSDs that have given an indication of their intention to provide CSD services in the UK and use the transitional regime.
The Dear CEO letter to non-UK CCPs provides an update on how the BoE intends to recognise non-UK CCPs post Exit day. The Dear CEO letter has been produced in light of the relevant draft statutory instrument, The Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018, being laid before Parliament.
The BoE states that it expects the draft statutory instrument to come into force in Q4 2018 (subject to the Parliamentary process). Once the statutory instrument has come into force non-UK CCPs will be able to submit formal applications for recognition to the BoE. The manner in which non-UK CCPs are expected to make the application is set out in Annex I to the Dear CEO letter. Significantly, the information is materially the same as is currently required by third country CCPs applying to the EU for recognition, with only limited changes made to replace references to "the EU" with references to "the UK". An application fee of £35,000 is also proposed.
The draft statutory instrument also provides for a temporary recognition regime for non-UK CCPs as part of the UK’s contingency planning for a no-deal Brexit. The temporary recognition regime will allow eligible non-UK CCPs, for which recognition decisions have not been made, to continue providing clearing services in the UK for a limited period of time post Brexit. The eligibility criteria is listed in Annex II of the Dear CEO letter. To enter the temporary recognition regime, an eligible non-UK CCP will need to inform the BoE in one of two ways: (i) providing a notification to the BoE before Exit day; or (ii) submitting an application for recognition before Exit day. The information the BoE expects non-UK CCPs to provide as part of their notification for entry into the temporary recognition regime is listed in Annex III of the Dear CEO letter. Once the temporary recognition regime comes into effect, the BoE will publish on its website a list of non-UK CCPs that have been recognised under it.
The BoE has published a consultation paper setting out its proposed general approach to amending financial services legislation under the European Union (Withdrawal) Act 2018 (EUWA 2018). Importantly, the BoE sets out in this consultation paper its general approach to
To provide background to the BoE’s proposals, the consultation paper notes that the Government is making a number of common changes to onshored legislation, the key common legislative changes include
The general approach is that the temporary transitional power will be used in such a manner as to ensure that firms and FMIs providing services within the BoE’s and PRA’s regulatory remits do not have to prepare immediately to implement onshoring changes by Exit day. The power is intended to be used in a broad way to delay the application of onshoring changes that would otherwise result in firms/FMIs needing to take action before Exit day for compliance purposes.
The proposed broad use of the transitional power would mean
The above list is not exhaustive. The PRA has considered three instances where it would not use the power to delay onshoring changes to firms’ obligations – as the granting of transitional relief would undermine its statutory objectives. The situations relate to: contractual recognition of bail-in terms, stay of resolution and proposed changes to the Depositor Protection and Policyholder Protection Parts of the PRA Rulebook.
The BoE is not proposing to reproduce or make amendments to the content of individual guidelines and recommendations ahead of Exit day. To provide clarity for UK firms and FMIs, included in appendices 1 to 3 of the draft statement of policy (attached to the consultation paper) are a list of guidelines that are currently complied with in the UK: firms and FMIs will be expected to comply with these guidelines after Exit day to the extent they remain relevant. The guidelines listed in the appendices include those derived from
Consultation Paper 26/18 – UK withdrawal from the EU: changes to PRA Rulebook and onshored BTS (CP26/18) sets out the PRA’s proposals to fix deficiencies in the PRA Rulebook arising from Brexit, and in relation to BTS within its remit that will be onshored into UK law. However, the BTS addressed by CP26/18 are limited to those for which HMT has already published draft statutory instruments for. The PRA also sets out proposals on how its non-binding materials, including Supervisory Statements, Statements of Policy and the Approach Documents, should be read by firms when the UK leaves the EU.
Importantly, the proposals in CP26/18 will only come into effect on Exit day if the Withdrawal Agreement is not ratified. If the Withdrawal Agreement is ratified, then the proposals will not come into effect until after the implementation period (December 31, 2020) and they may be further modified to take into account any agreement the UK and EU may reach on the future relationship.
Chapter 2 of CP26/18 deals with PRA non-binding materials, and a draft Supervisory Statement is set out in Appendix 1. The draft Supervisory Statement explains that the general approach that the PRA is taking is that it will not be making line-by-line amendments to its non-binding materials (except for Supervisory Statement 18/15: Depositor and dormant account protection) and instead firms will need to interpret these in light of the UK leaving the EU, including any amendments made to UK legislation under the EUWA 2018. The draft Supervisory Statement provides some examples of proposed changes. For instance, it states that any reference to passporting, or processes associated with passporting, are redundant. Where capital or liquidity consolidation was previously only required at the EEA level, this would be required at the UK level after Exit day. Firms will need to interpret references to EEA consolidated group, to UK consolidated group.
The approach to reporting and disclosure requirements is covered in chapter 3 of CP26/18. The general approach is that the PRA is not proposing to make line-by-line changes to regulatory reporting requirements but instead proposes a more proportionate approach that is further described in a draft Supervisory Statement set out in Appendix 2. The draft Supervisory Statement covers a general approach to reporting requirements by setting out various different types of EU-based references and a default approach to how these should be interpreted. It then goes on to describe specific cases including reporting and disclosure requirements based on the Capital Requirements Regulation.
Chapter 4 of CP26/18 is an important chapter in that it describes proposals relating to PRA-regulated banks, building societies and designated investment firms. Of particular importance is the discussion regarding the contractual recognition of bail-in and stay in resolution. The proposed changes to the PRA rules on the contractual recognition of bail-in are set out in Appendix 4.
The PRA makes two important proposals
Chapter 4 also covers the regulatory technical standards (RTS) for risk-mitigation techniques for over-the-counter (OTC) derivative contracts not cleared by a CCP. This RTS imposes risk management obligations on firms for non-cleared OTC derivative transactions. These obligations apply to firms individually. The general approach that the PRA proposes is to treat Member States as third countries. The PRA notes that this approach to onshoring may require repapering of bilateral agreements, as well as changes to the arrangements counterparties have in place in respect of collateral for these derivative transactions.
The PRA proposes other amendments to the RTS, including those in relation to
The PRA notes that the RTS contain a number of phase-in provisions (including initial margin and the application of the requirements to single-stock equity options). The PRA advises that whilst as a matter of law these provisions are not onshored under the EUWA 2018, firms should plan on the assumption that “requirements arising from new EU legislation that comes into effect during an implementation period lasting until December 31, 2020 would apply to them.”
In terms of ring-fenced banks, the PRA refers to an earlier HMT policy note confirming that ring-fenced bodies will be permitted to continue operating through a branch or a subsidiary in the EEA immediately after Exit day. However, the PRA proposes to amend one rule (Rule 16.3 of the Ring-fenced Bodies Part of the PRA rulebook) requiring ring-fenced bodies that use non-UK CCPs or CSDs to ensure comparable outcomes in respect of account segregation to those specified for UK-based CCPs and CSDs.
Chapters 5 and 6 deal with insurers and credit unions respectively. The chapter on insurance covers proposals regarding the location of branch assets and admissible assets. In relation to credit unions the PRA notes that 55 credit unions currently have deposits and investments with non-UK (EEA) providers and that all but one of these providers have confirmed that they intend to apply for UK authorisation following Exit day. The PRA states that “it seems likely that credit unions which have placed funds with these institutions will be able to keep them there (albeit that the funds may be transferred to a different entity of the same banking group).”
The temporary permissions regime is covered in chapter 7 and the PRA focuses on adjustments to the definition of non-Directive insurer and the applicability of the Senior Manager and Certification Regime (SM&CR) to firms without a branch in the UK.
The PRA proposes to apply the SM&CR rules for UK branches of third country firms to firms in the temporary permissions regime including, with modifications, to cross-border service providers without a UK branch. The PRA also makes specific proposals relating to the shortened notification process known as "deemed approval" under the draft statutory instrument that implements with the temporary permissions regime (The EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018). In particular the PRA proposes to provide firms within the temporary permissions regime with a period of up to 12 weeks from Exit day in which to obtain deemed (or full) approval for individuals who require it. The Certification Regime and requirements concerning regulatory references will also be applied to cross-border service providers who enter the temporary permissions regime (with or without a branch).
The PRA makes a number of proposals in chapter 8 relating to the Financial Services Compensation Scheme (FSCS). In particular the PRA proposes to change its rules to provide that from Exit day, FSCS depositor protection would only protect depositors with eligible deposits held by UK establishments of firms with FSMA Part 4A permissions to accept deposits. The PRA also discusses the position as regards deposits held by UK establishments of EEA firms and deposits held by UK firms’ branches in the EEA. In relation to the latter the PRA proposes to amend its rules such that the deposits will no longer be protected by the FSCS.
The BoE consultation paper dealing with changes to FMI rules and onshored BTS is relevant to FMIs supervised by the BoE, as well as market infrastructures and market participants. Essentially the BoE sets out proposals that are intended to fix deficiencies arising from Brexit in onshored BTS that the BoE as FMI supervisor will be responsible for.
The changes in the consultation paper would only come into effect on Exit day where the Withdrawal Agreement is not ratified. If the Withdrawal Agreement is ratified, then the proposed amendments would come into force at the end of the implementation period (albeit they may be further modified depending on any agreement between the UK and the EU on the future relationship).
This consultation paper is relevant to all firms subject to the BoE’s resolution powers. It sets out the BoE’s proposals for fixing deficiencies arising from Brexit in relation to the onshored Bank Recovery and Resolution Directive (BRRD) BTS for which it is responsible.
Like the other BoE/PRA consultation papers the proposals will have an effect on Exit day only if the Withdrawal Agreement is not ratified. If the Withdrawal Agreement is ratified, the proposed changes will apply at the end of the implementation period (albeit they may be further modified depending on any agreement between the UK and the EU on the future relationship).
The BRRD BTS to which the BoE proposes to make changes to are as follows
The BoE is not consulting on amendments to Commission Implementing Regulation (EU) 2016/1066 (on provision of information for the purpose of resolution plans). This is on the basis that the EBA is proposing to repeal this BTS and replace it with an updated one. The BoE will bring forward proposals on the updated BTS before Exit day.
There are a few material amendments to the BRRD BTS that the BoE discusses in chapter 3. These include
The BoE states that it has not made changes to the BRRD BTS where certain concepts, while not identical, have a pre-existing and clear counterpart in UK law. The PRA gives the example that certain BRRD BTS refer to "ex ante" and "ex post" valuations. The PRA states that these should continue to be read as references to the pre-resolution and full valuations under the Banking Act 2009 (the Act). Similarly the BRRD BTS references to "sale of business tool" and "bridge institution" should continue to be read as references to the "private sector purchaser" and "bridge bank" options under the Act.
The BoE also makes a number of comments in chapter 2 concerning interpreting the existing Statements of Policy on resolution. In particular, the PRA makes the following points
Deadline for comments on the consultation papers
The deadline for comments on all the consultation papers is January 2, 2019.
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