The Financial Markets and Insolvency (Amendment and Transitional Provision) (EU Exit) Regulations 2018: explanatory information
Published 31 October 2018
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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. Alongside the EU (Withdrawal) Act 2018 powers the instrument is also being made under section 2(2) of the European Communities Act 1972. This is to ensure that clarifications to the operation of the regime are made in an efficient manner and to remove discrepancies with the approach in other related legislation, ensuring a clearer regime is in place on exit day.
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 Settlement Finality Regulations, the Companies Act 1989, the Financial Collateral Arrangements Regulations and the Banking Act 2009 provide provisions under UK domestic law concerning financial market infrastructure insolvency that reflect EU law (in particular, the Settlement Finality Directive, the Financial Collateral Arrangements Directive, the European Market Infrastructure Regulation, the Markets in Financial Instruments Directive and the Banking Recovery and Resolution Directive). These provisions provide essential protections to Financial Market Infrastructures (FMIs) and assist the functioning of financial markets.
The Financial Markets and Insolvency (Amendment and Transitional Provision) (EU Exit) Regulations 2018 (the SI) introduce changes across existing domestic legislation as set out above, so that it can continue to operate effectively after the UK leaves the EU.
3.2 Deficiencies this SI remedies
This SI introduces a number of consequential changes to existing domestic legislation as well as providing necessary amendments to the Settlement Finality Regulations so that UK protections can be provided to systems outside of the UK that are not governed by UK law.
Changes introduced by the SI include:
Amendments of primary legislation
Part 2 of the SI brings in changes to both Part 7 of the Companies Act 1989 and Banking Act 2009. These are technical fixes such as clarifying the scope of these provisions and the removal of references to EU legislation replacing with UK equivalents.
Amendments of secondary legislation
Part 3 introduces amendments to the Settlement Finality Regulations (SFRs), the Financial Collateral Arrangements Regulations and existing UK financial markets and insolvency regulations. The majority of these changes confirm the scope of this legislation and remove EU references.
For the SFRs, the scope of the existing UK legislation is being amended to include systems not governed by UK law and central banks outside the UK. These non-UK systems will be able to apply to the Bank of England for designation under the SFRs, under broadly the same criteria as UK systems. Some central bank operations (collateral operations for example) also benefit from settlement finality protections. Consequently, the Bank of England will also be responsible for the designation of non-UK central banks, which they do not currently have the power to do.
References to Gibraltar are included in the SI, to clarify that any system designated under an equivalent to the SFRs in Gibraltar will receive broadly the same treatment as non-UK designated systems.
Existing designation orders
Part 4 of the SI confirms that any system that has SFRs’ protections at the point of the UK’s exit from the EU will continue to receive these protections under UK law after exit day (in addition, other provisions in part 3 ensure protections under the existing SFRs will continue to apply to transactions entered into prior to exit day). These systems will not have to reapply for designation from the Bank of England.
Temporary designation regime
The provisions in part 5 of the SI allow EEA systems that benefit from UK protections under the EU Settlement Finality Directive before exit day to continue to do so after exit day on a temporary basis whilst their full application is considered by the Bank of England. The regime will last for three years from exit day, with a power for HM Treasury to extend the regime by no more than 12 months at a time if it is necessary and proportionate to avoid disruption to UK financial stability.
These systems will be required to notify the Bank of England before exit day to enter the regime. After exit day, these systems will have 6 months to make a full application under the SFRs to continue to benefit from SFR protections.
The Bank of England, in accordance with the SI, will maintain a public list of systems (and central banks) who are within the UK SFRs, the temporary regime and the non-UK regime.
3.3 Relevant Rulebook and Binding Technical Standard changes
The FCA and PRA will be updating their rulebooks to reflect the changes introduced through this SI (among others), and to address any deficiencies as a result of the UK leaving the EU. The FCA and PRA have confirmed their intention to consult on these changes in the autumn.
3.4 Stakeholders
The key stakeholders are UK and EEA financial market infrastructures and central banks which benefit from protections against UK insolvency law granted under the Settlement Finality Regulations. These provisions will also apply to other central banks and to non-UK systems who wish to provide services to UK firms after exit as they will be able to apply to the Bank of England for designations under the SFRs.
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.
4. Next steps
HM Treasury plans to lay this instrument before Parliament in the autumn.
5. Further information
6. Enquiries
If you have queries regarding this instrument, email [email protected].