Guidance

The Investment Exchanges, Clearing Houses and Central Securities Depositories (Amendment) (EU Exit) Regulations 2018: explanatory information

Updated 29 October 2019

1. Stay up to date

The UK is leaving the EU. This page tells you how to prepare for Brexit and will be updated if anything changes.

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2. 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.

3. Notice

This policy note is intended to provide Parliament and stakeholders with further details on our approach to onshoring financial services legislation. HM Treasury has proposed this statutory instrument to be laid under the negative resolution procedure. It will be considered by the Parliamentary sifting committees ahead of being formally laid. Read ‘The Investment Exchanges, Clearing Houses and Central Securities Depositories (Amendment) (EU Exit) Regulations 2018’ statutory instrument.

4. Policy background and purpose of the SI

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

This SI amends relevant parts (Part 18, 18A and Schedule 17A) of the Financial Services and Markets Act 2000 (‘FSMA’) that outline the regulatory regime for recognised investment exchanges, EEA market operators, clearing houses (including central counterparties, or ‘CCPs’) and central securities depositories (‘CSDs’) operating in, or (in the case of certain CSDs) offering services to, the UK. It also amends the Financial Services and Markets Act 2000 (Recognition Requirements for Investment Exchanges, Clearing Houses and Central Securities Depositories) Regulations 2001/995 (‘RRRs’), which are made under Part 18 of FSMA. Amongst other provisions, Part 18 of FSMA sets out:

• The exemptions to the general prohibition, under which recognised investment exchanges (RIEs), clearing houses, CCPs and CSDs are able to carry on a regulated activity in the UK without being authorised under FSMA

• The recognition and supervisory powers of the relevant regulators – the Financial Conduct Authority (FCA) in respect of RIEs and the Bank of England in respect of recognised clearing houses, CCPs and CSDs

• The regulatory framework for acquisitions of control over RIEs; and

• The ‘passporting’ rights of EEA market operators in the UK and RIEs operating in EEA States

The RRRs set out the recognition requirements for investment exchanges, clearing houses, CCPs and CSDs in detail, while Part 18A of FSMA sets out the FCA’s powers and duties relating to suspensions and removals of financial instruments from trading in the UK and in EEA states.

Schedule 17A of FSMA makes a provision for a memorandum of understanding between the FCA and the Prudential Regulatory Authority (PRA) with respect to the exercise of their functions in relation to recognised bodies; applies certain provisions in relation to the rules made by the Bank of England under FSMA; makes provisions relating to the winding up, administration or insolvency of recognised clearing houses and recognised CSDs; and makes provisions about fees payable by clearing houses, CCPs and CSDs to the Bank of England. Much of this domestic law is closely linked to EU legislation which is being onshored via a number of other SIs, with the Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018, the Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018 (‘CCR’), the Central Securities Depositories (Amendment) (EU Exit) Regulations 2018 and the Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018 also being of particular relevance to RIEs, CCPs, CSDs and market operators. As such, this SI makes a number of consequential amendments to Part 18, 18A and Schedule 17A of FSMA and the RRRs to reflect amendments made to retained EU law via the SIs listed above.

4.2 Deficiencies this SI remedies

This SI addresses deficiencies in UK law set out above to ensure that it continues to operate effectively in the UK once the UK has left the EU. Changes that the SI will make include:

Removal of passport rights for EEA market operators in the UK and RIEs operating in EEA States – Part 3 of the SI

As outlined in the EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018, any references in UK legislation to the EEA financial services ‘passporting’ system will become deficient at the point of exit, if the UK leaves the EU without a deal. As a consequence, this SI removes Chapter 3A under Part 18 of FSMA, which provides the passport rights of EEA market operators in the UK and RIEs operating in EEA States.

As HM Treasury are not putting in place a temporary recognition regime for EEA market operators in a ‘no deal’ scenario, EEA market operators who currently make use of passport rights may wish to apply to be recognised as a recognised overseas investment exchange (ROIE), to enable participation of the exchange in UK markets. The FCA have published a direction clarifying how an EEA market operator may make an application to become a ROIE.

EEA market operators which do not maintain a permanent place of business in the UK may be able to rely on the overseas persons exclusion (OPE), located in section 72 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, following the UK’s withdrawal from the EU, to the extent that they would otherwise be deemed to be carrying on a regulated activity in the UK. However, EEA market operators who cannot rely on the OPE and who wish to continue undertaking regulated activities in the UK should ensure that they can do so, such as by seeking to apply for recognition as a ROIE as outlined in the FCA direction above, as soon as possible. Market operators should seek their own advice on the application of the UK regulatory framework to their circumstances.

Transfer of responsibilities – Part 3 of the SI

As a consequence of the UK exiting the EU, the European Securities and Markets Authority (ESMA) will no longer be able to carry out functions determining whether third-country CCPs and CSDs can provide services in the UK post exit. This SI therefore contains appropriate amendments in domestic law to reflect the transfer of responsibility for recognising third country CSDs to the Bank of England, for the purpose of allowing them to provide the relevant services in the UK after exit. Corresponding amendments in respect of third-country CCPs are made by the CCR.

Redefining of third country CSDs and extending regulators’ supervisory powers – Part 3 of the SI This SI amends the definition of third country CSDs in FSMA Part 18. Third country CSDs currently refer to any CSDs located outside the EU, whereas following exit third country CSDs will refer to any CSD located outside the UK. The SI therefore also deletes any references to the term “EEA CSD”. This SI provides the Bank of England with appropriate supervisory powers over third country CSDs. For example, the regulators now have the power to require information from, and inspect any UK branch of, a third country CSD and, the Bank of England’s functions relating to public records and disclosure are extended to cover third country CSDs, in light of the Bank’s new responsibility for recognising such CSDs and the deletion of existing powers over EEA CSDs.

Information sharing and cooperation requirements – Part 3 of the SI

When the UK is no longer part of the single market, it would not be appropriate for UK supervisors to be obliged to share information or cooperate unilaterally 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.

For example, this SI removes the obligation for the FCA to inform ESMA and the competent authorities of EEA member states when it suspends or removes a financial instrument from trading on a venue that falls under its jurisdiction, although the FCA will still be required to publish such decisions in a manner it considers appropriate. Similarly, the FCA will no longer be obliged to require venues under its jurisdiction to suspend or remove a financial instrument from trading if the same instrument has been suspended or removed from trading in another EEA member state.

Cross-references to EU legislation in FSMA and other references to EU bodies and member states - Part 3, 4 & 5 This SI amends definitions in FSMA that are cross-referenced to definitions in EU legislation, generally by referring to onshored legislation, EU law as retained on exit day, or by creating new definitions, in order to achieve a functioning standalone UK legislative framework. This SI (together with the CCR) also deletes references to EEA bodies and EEA member states that will become redundant when the UK leaves the EU. As a result, CCPs, CSDs and market operators that are EEA entities will be treated in the same way that third-country entities are currently treated in domestic legislation.

Relevant Rulebook and Binding Technical Standard changes

The FCA and the Bank of England will be updating their Handbook/Rulebook and relevant binding technical standards to reflect the changes introduced through this SI, and to address any deficiencies due to the UK leaving the EU. The FCA and the Bank of England have confirmed their intention to consult on these changes in the autumn.

4.3 Stakeholders

This SI will affect EEA market operators providing services in the UK. For example, EEA market operators may wish to apply to the FCA to seek recognition as a ROIE. It will also affect third-country CSDs (both EEA and non-EEA) by modifying the Bank of England’s regulatory powers in respect of them. 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. HM Treasury has engaged with industry bodies where possible to ensure awareness of these changes.

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. Next steps

HM Treasury has proposed this statutory instrument to be laid under the negative resolution procedure. It will be considered by the Parliamentary sifting committees ahead of being formally laid.

6. Further information

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

Read The FCA’s role in preparing for Brexit.

Read Bank of England’s approach to financial services legislation under the European Union (Withdrawal) Act.

7. Enquiries

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