Brexit Watch #5: Brexit extension – how are the regulators reacting?

During a meeting of the Special European Council on the 10 April 2019, EU leaders agreed to a flexible Brexit extension until 31 October 2019, to allow for the ratification of a withdrawal agreement.

Despite this extension, there is still great pressure on Theresa May to secure a deal before the EU Parliament elections are due to take place in the UK on Thursday 23 May. If the Prime Minister does not lock in a deal before this date, the UK will be forced to participate in the EU elections, or else face leaving the EU without a deal on 1 June. The European Council will review the progress in June 2019.

This article looks at the reactions by the UK regulators and the European Supervisory Authorities as to the potential impacts of the extension. 

Is the FCA Temporary Permissions Regime (TPR) window being extended?

Following the announcement of the Brexit extension, the FCA confirmed that the notification window for EEA firms to enter the UK TPR will be extended to 30 May 2019 and 16 May 2019 for fund managers.

What are the European Supervisory Authorities (ESAs) saying about current uncertainty?

ESAs Report – Risks and Vulnerabilities to the EU Financial System

Sustained indecision about the UK’s exit date has continued to cause uncertainty surrounding the future of the financial system within the EU. On 2 April 2019, the EBA, ESMA and EIOPA released the Joint Committee Report on Risks and Vulnerabilities in the EU Financial System, which details the “Uncertainties around the terms of the United Kingdom's withdrawal from the European Union”.

Within the report, the EU authorities urge the importance of preparing for a no-deal Brexit, and the increasing likelihood of this scenario. The report continues to highlight that the relocation of financial services activities is an important consequence of Brexit, and that the UK leaving without a ratified withdrawal agreement may have a severe impact on the ability of financial institutions to execute their current contractual rights and obligations. Furthermore, funding needs may be affected by potentially rising costs which may negatively affect profitability in the medium-term. This potential scenario, along with other factors may jeopardise banks’ efforts to further reduce non-performing loans. Overall, the report sends out the message that adequate contingency planning remains crucial for the sector and that institutions should be prepared for potential market volatility.

Is the UK regulator signing any agreement with other non-EU regulators/supervisors?

Reaffirmed partnership between USA Securities and Exchange Commission and FCA

On 29 March, 2019 Andre Bailey, CEO of FCA and Jay Clayton, SEC Chairman signed two updated Memorandum of Understanding (MoUs) to ensure effective and efficient cross-border oversight of regulated entities and information sharing.

The MoU covering supervisory arrangements was updated to expand the scope of covered firms to include firms that conduct derivatives, credit rating and derivatives trade repository businesses to reflect FCA’s assumption of responsibilities from European Securities and Markets Authority (ESMA) in the event of the UK’s withdrawal from the EU.

The second MoU, relating to UK Alternative Investment Fund Manager regulations, has been updated to ensure investment advisers, fund managers, private funds and other covered entities in the alternative fund industry will be able to continue cross-border operations with minimal disruption due to UK’s withdrawal from the EU.

Partnership between FCA and Australian Securities and Investments Commission (ASIC)

On 8 April 2019, FCA and the ASIC announced signing of two key MoUs. The objectives of these MoUs is to ensure cross-border cooperation between the FCA and ASIC, ensure uninterrupted exchange of information and to support the “continuity of existing equivalence to businesses post-Brexit”.

The amended MoUs, which aim to strengthen the FCA and ASIC partnership post Brexit, include:

  1. MoU on trade repositories
  2. MoU on Alternative Investment Funds (AIFs)

Furthermore, Her Majesty’s Treasury (HMT) has confirmed that the UK will adopt the existing EU equivalence decisions in relation to Australia’s supervisory and regulatory regime for trading venues, OTC derivatives markets and credit rating agencies. 

What other measures is the UK regulator taking?

  1. FCA Dear CEO Letter – wholesale broking firms

The FCA published a ‘Dear CEO’ letter on 18 April 2019. The letter aims to explain FCA’s view of the key harms that brokerage firms, operating in wholesale financial markets, pose to clients and markets.

FCA has planned a two-year supervisory strategy that will focus on ensuring that brokers comply with legislative requirements and implement strategies to mitigate any harm to clients and markets arising from:

  1. Brexit
  2. Market abuse and financial crime controls
  3. Technology – particularly cyber crime
  4. Brokers’ governance arrangements and cultures
  5. Compensation and incentives
  6. Capacity and conflicts of interest

In relation to Brexit, the letter states: “We expect the senior managers of firms to take responsibility for ensuring that its plan will allow the firm to act in the best interest of clients, and in line with applicable regulatory requirements, in all possible Brexit scenarios. Firms should keep us closely informed of those plans, including their communications with clients.”

  1. The Bank of England and the PRA – Amendments to the financial services legislation under the European Union (Withdrawal) Act 2018

On 18 April 2019, The Bank of England and the PRA co-issued a supplementary Policy Statement to amend the version of Policy Statements issued in February 2019. This version of the statement includes policy materials for a hard Brexit as well as EU Exit Instruments.  They will be effective as of ‘exit date’ in a ‘no deal’ scenario with the exception of one EU Exit Instrument 2019 (in relation to Annex BF of the PRA Rulebook), which will be effective from 1 July 2019.

Furthermore, this statement finalises the ‘near-final’ instruments and policies published in February 2019. The policy and the text of published materials have not been altered significantly since their publication as ‘near final’.

Some of the amendments from the final version issued in February 2019 include:

  1. Changes to Depositor Protection and Policyholder Protection Parts of the PRA rulebook;
  2. International Accounting Standards Regulation references have been aligned with the relevant BEIS EU Exit SI: The International Accounting Standards and European Public Limited-Liability Company (Amendment etc.) (EU Exit) Regulations 2019.

In summary

Assuming that the Prime Minister does not secure a deal before 23 May 2019, the Brexit extension until October 2019 will go ahead. The UK regulators are preparing for all eventualities and the ESAs have published their concerns around potential risks and vulnerabilities in the event of a no-deal Brexit highlighting the relocation of financial services activities as an important consequence. Financial services firms are being urged to act and plan with respect to the best possible interest of clients and markets alongside their own business strategies and the regulators are keen to remain appraised. The wider world waits to witness the next developments in the on-going negotiations.