Guidance

Draft Credit Rating Agencies (Amendments etc.) (EU Exit) Regulations 2018: explanatory information

Updated 30 November 2018

1. Context

The European Union (Withdrawal) Act 2018 (EUWA) repeals the European Communities Act 1972 on the day the UK leaves the EU and converts into UK domestic law the existing body of directly applicable EU law. The purpose of the EUWA is to provide a functioning statute book on the day we leave the EU.

The EUWA also gives Ministers powers to make statutory instruments (SIs) to prevent, remedy or mitigate any failure of EU law to operate effectively, or any other deficiency in retained EU law. We refer to these contingency preparations for financial services legislation as ‘onshoring’.

HM Treasury is using these powers to ensure that the UK continues to have a functioning financial services regulatory regime in any scenario.

This SI is part of the wider work the government is undertaking to prepare for the UK’s withdrawal from the EU. It is not intended to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition. The changes made in this SI would not take effect on 29 March 2019 if, as expected, we enter an implementation period.

2. Notice

The attached draft SI is intended to provide Parliament and stakeholders with further details on our approach to onshoring financial services legislation. The draft instrument is still in development. The drafting approach, and other technical aspects of the proposal, may change before the final instrument is laid before Parliament.

3. Policy background and purpose of the SI

3.1 What does the underlying EU regulation and UK law do?

The Credit Rating Agencies Regulation (CRAR) was introduced in 2009 to regulate credit rating agencies (CRAs) established in the EU. Credit ratings are an opinion on the creditworthiness of an entity or financial instrument, and are used by firms for determining capital requirements under the Capital Requirements Regulation and Solvency II. Only credit ratings issued under the CRAR can be used for regulatory purposes. The European Securities and Markets Authority (ESMA) is responsible for supervising firms registered under the CRAR.

The CRAR will be brought into UK law (as retained EU law) under the EUWA. This SI will amend the CRAR to make it work in a UK context in a no-deal scenario. ESMA’s functions in relation to UK CRAs, including registration and supervision, will be transferred to the Financial Conduct Authority (FCA) at exit point, in the event there is no agreement or transition period. However, additional powers and functions are required so the FCA is able to fulfil this new role effectively. These include certain procedural processes such as appeal rights and notice procedures, disciplinary and criminal sanctions, information gathering powers, as well as exemption from liability in damages and the ability to levy fees, which already apply to some existing areas of UK supervision and will be extended to CRAs in this instrument.

3.2 Deficiencies this SI remedies

This SI will make amendments to retained EU law related to the CRAR to ensure that it continues to operate effectively in the UK once the UK has left the EU. It also contains substantive provisions (Parts 3 and 4) and modifications to existing UK primary and secondary legislation (Parts 4 and 5) to achieve that outcome.

3.3 Registration regimes

Consistent with the current approach to regulating CRAs in the EU, firms wishing to apply for registration will need to maintain or establish a legal entity here. To allow the registration and supervision of UK CRAs to transfer from ESMA to the FCA with minimal disruption, this SI includes a Conversion Regime and a Temporary Registration Regime (TRR) for CRAs. It confers functions and powers on the FCA that are required to start the preparatory work for registering UK CRAs prior to exit day, to maintain continuity and ensure that UK firms can continue to use credit ratings without disruption at the point of exit. The SI sets out the process for three types of “pre-exit” applications.

• the automatic registration process (or Conversion Regime) for registered CRAs who are established in the UK. They will need to notify the FCA, 20 days prior to exit day, that they wish to convert their ESMA registration to registration with the FCA
• the automatic certification process, under which certified CRAs established outside the EU will be able to notify the FCA, no later than 20 days prior to exit day, of their intention to extend their certification to the UK
• the TRR is only available to new legal entities established in the UK that are part of a group of CRAs with an existing ESMA registration on exit day. Such entities enter the TRR if they have submitted an advance application, which has not yet been determined, to the FCA prior to exit day

For other firms wishing to apply for registration as a new CRA in the UK, the TRR will not be available, and applications will be processed by the FCA in accordance with the usual procedures set out in the retained CRAR.

3.4 Endorsement and certification of ratings

This SI will amend CRAR to enable ratings to be used for regulatory purposes in the UK if those ratings are issued by a CRA established in the UK and registered with the FCA. The provisions for endorsement and certification will also apply, modified to work in a UK context, allowing ratings issued in third countries (and which meet certain conditions) to be used for regulatory purposes in the UK.

Consistent with the broader approach to transferring functions, responsibility for assessing third country regulatory frameworks for the purposes of endorsement will be transferred from ESMA to the FCA. To ensure continuity at the point of exit, the FCA will adopt existing decisions made by ESMA on the suitability of non-EU regulatory frameworks. The SI will also introduce a transitional period to allow for ratings issued before exit day in the EU by firms who register with the FCA or apply for registration with the FCA to be used in the UK for regulatory purposes for up to one year. After this time, all ratings will need to be issued or endorsed into the UK for them to be eligible for regulatory use.

In line with our general approach, the power to make equivalence decisions will be transferred from the Commission to HMT. Existing Commission equivalence decisions on third countries will be automatically retained under the EU (Withdrawal) Act.

3.5 Appeal/review rights and notice procedures

The EU CRAR contains several provisions enabling CRAs to appeal investigative and enforcement decisions made by ESMA to the Joint Board of Appeal of the European Supervisory Authorities and ultimately to the Court of Justice of the EU (ECJ).

Investigation and enforcement powers in relation to CRAs in the UK will be transferred to the FCA by this SI. The Board of Appeal and ECJ will no longer have jurisdiction under UK CRAR, and therefore references to these EU institutions are being replaced with appropriate UK institutions – in this case the Upper Tribunal, which is consistent with other appeals of FCA decisions under the Financial Services and Markets Act 2000 (FSMA). The following decisions will be subject to the FCA’s Supervisory Notice Procedure (which builds in a right of appeal to the Tribunal):

• decisions to refuse registration of a CRA (or group of CRAs)
• decision to withdraw registration
• decision to temporarily prohibit a CRA from issuing ratings or to suspend the regulatory use of ratings issued by a CRA

This SI also applies the FCA’s Warning and Decision Notice procedures in respect of other decisions it takes under the UK CRAR regime (which are also subject to a right of appeal to the Tribunal). This is to enable its decision and appeals procedures to fit together effectively and to provide consistency with its current functions. Other decisions of the FCA under its functions in relation to CRAs will be subject to judicial review in the usual way.

3.6 Supervisory cooperation

When the UK is no longer part of the single market, it would not be appropriate for UK supervisors to be unilaterally obliged to share information or cooperate with EU authorities, without any guarantee of reciprocity. As such, provisions in legislation relating to cooperation and information sharing have been removed. However, this will not preclude UK supervisors from sharing information with EU authorities where necessary, as the existing domestic framework for cooperation and information sharing with countries outside the UK already allows for this on a discretionary basis.

4. Relevant Rulebook and Binding Technical Standard changes

The FCA will be updating its Rulebook and relevant Binding Technical Standards to reflect the changes introduced through this SI, and to address any deficiencies that arise as a result of the UK leaving the EU. The FCA has confirmed its intention to consult on these changes in the Autumn.

5. Stakeholders

This SI affects credit rating agencies and users of credit ratings. HM Treasury has engaged with industry bodies where possible to ensure awareness of these changes. As already noted, the intention of this SI is not to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition to this position.

This SI does not include provisions that may be necessary to ensure Gibraltarian financial services firms’ continued access to UK markets in line with the UK government’s statement in March 2018, and other provisions dealing with Gibraltar more generally. Where necessary, provisions covering Gibraltar will be included in future SIs.

5.1 Next steps

HM Treasury plans to lay this instrument before Parliament in the autumn.

5.2 Further information

Read HM Treasury’s approach to financial services legislation under the European Union (Withdrawal) Act 2018.

5.3 Enquiries

If you have queries regarding this instrument, email [email protected]