Brexatious Days: no deal contingency plans

In line with the UK Government's earlier statement that "as we get nearer to March 2019, preparations for a ‘no deal’ scenario would have to be accelerated" (although, it stresses, "such an acceleration does not reflect an increased likelihood of a ‘no deal’ outcome"), October saw the publication of a number of important documents providing more detail on what the rules look like for a no deal scenario. We now have a draft UK law for MiFIR, proposal for a temporary transitional power to be exercised by UK regulators, and two hefty FCA consultation papers. This article covers recent developments and provides useful links.

Brexatious Days: no deal contingency plans

Introduction

I was going to say with Brexit these days it “seems” like we’re stuck in No-Man’s land when a Hamlet quote from my student days popped into my mind:

“Seems” madam? Nay, it is. I know not “seems”.

We’re in No-Man’s land. On the one hand, we could leave the European Union on 29 March 2019 with no deal. On the other hand, a deal could be agreed any day, meaning an implementation period up to end of 2020 where, for all intents and purposes, nothing changes: the UK is still part of the EU and follows its rules. More, if recent reports are correct, Prime Minister May is considering agreeing a longer implementation period past end of 2020 if needed.

Wrapped around all of this is uncertainty: a deal could be agreed at any time up to 29 March 2019 but no-one can sit around and wait for that. Contingency plans have to be made for a no deal scenario.

What is a “no deal scenario”? The Government gives this definition: “A ‘no deal’ scenario is one where the UK leaves the EU and becomes a third country at 11pm GMT on 29 March 2019 without a Withdrawal Agreement and framework for a future relationship in place between the UK and the EU.

The UK government and regulators outlined their approach to managing a no deal scenario several months ago. In line with the Government’s earlier statement that “as we get nearer to March 2019, preparations for a ‘no deal’ scenario would have to be accelerated” (although, it stresses, “such an acceleration does not reflect an increased likelihood of a ‘no deal’ outcome”), October saw the publication of a number of important documents providing more detail on what the rules look like for a no deal scenario.

 

From the Government

If you want a recap, this handy document on the UK Government’s preparations for a ‘no-deal scenario’ gives the context to why the Government is publishing a number of draft laws. The UK leaving without a deal is “unlikely”, the Government says, but that it is “our duty as a responsible government to prepare for all eventualities, including ‘no deal’, until we can be certain of the outcome of those negotiations.” Therefore it has published a whole raft of draft Brexit contingency laws covering everything from seafaring to studying to travelling. And for financial services…

Useful link: HMT has published links to all its financial services legislation under the EU (Withdrawal) Act 2018 here.

Draft UK law on MiFID II/MiFIR

On 5 October HMT published its draft MiFIR statutory instrument (SI). A couple of points to note are:

  • This SI incorporates MiFIR level 1 rules (the Regulation) and some level 2 rules (the level 2 Regulation drafted by the Euroclear Commission). MiFID II level 1 (the Directive) and the level 2 Directives drafted by the Euroclear Commission have been transposed into UK law/rules already, therefore, these existing UK laws/rules are also being amended. See my article here if you want to know more about the difference between a Regulation and Directive, and MiFID II level 1 and level 2.
  • The SI is not intended to make policy changes, other than to reflect the UK’s new position outside the EU. For example, HMT notes that: “UK branches of EEA firms currently send transaction reports to their home regulator rather than to the FCA [under MiFIR]. The effect of this SI is to require UK branches of EU firms to report to the FCA, in the same way as UK branches of non-EEA firms are required to do.”
  • The changes made in this SI would not take effect on 29 March 2019 if an implementation period is agreed.

Temporary Transitional Power for UK Regulators proposal

On 8 October, HMT also published more details on its Proposal for a temporary transitional power to be exercised by UK regulators. The repeated, stated aim of HMT and the regulators is to minimise disruption in financial markets and ensure a smooth transition when the UK leaves the EU. Therefore, in addition to planning some temporary transitional regimes for firms, HMT also intends:

“…to temporarily empower the UK financial regulators – the Bank of England, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) – to make transitional provision by waiving or modifying firms’ regulatory obligations where those obligations have changed as a result of onshoring financial services legislation. For example, the power could be used to delay the application of onshoring changes…”.

The power to make transitional provision would be available to the regulators for 2 years from exit and must first be approved by Parliament. The FCA refers to these proposed powers in CP18/28 (see below).

Recent Financial Conduct Authority (FCA) documents

On the 10 October, the FCA published two hefty consultation papers (CPs), both of which close for comment on 7 December 2018.

CP18/28: Brexit: proposed changes to the Handbook and BTS

This CP sets out how the FCA proposes to amend its Handbook and will transpose EU regulatory technical standards (RTS) and implementing technical standards (ITS) into UK binding technical standards (BTS) if the UK leaves the EU without a deal.

It’s worth noting that while CP18/28 does cover a lot of MiFID II rules, it doesn’t address the MiFID II RTS dealing with pre and post trade transparency which are the so-called:

  • RTS 1 (transparency rules for equity instruments)
  • RTS 2 (transparency rules for non-equity instruments),
  • RTS 3 (the double volume cap)
  • RTS 11 (the tick size regime)

The FCA states it will communicate on what the approach for these rules will be in due course.

 

CP18/29: Temporary permissions regime for inbound firms and funds

The temporary permissions regime (TPR) will allow EEA firms and funds to continue regulated business in the UK, if the UK leaves the EU in March 2019 without an implementation period in place.

In short, firms and funds will need to notify the FCA that they wish to use the TPR. The FCA plans to open an online notification window in early 2019 which will close prior to exit day (29 March 2019). The temporary permission will last for a maximum of 3 years, but during this period the firm/fund will be asked to submit their application for full authorisation in the UK and subsequently leave the TPR.

This is helpful for firms and funds wanting to carry on doing business in the UK: the missing piece, of course, is that there is currently no reciprocal arrangement in place for UK firms or funds to continue passporting into the EEA in a no deal scenario.

 

More to come

Look out for the FCA’s second Brexit CP later in Autumn.

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