Guidance

Credit Institutions and Insurance Undertakings Reorganisation and Winding Up (Amendment) (EU Exit) Regulations 2018: explanatory information

Updated 29 October 2019

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Context

The EU 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 Act is to provide a functioning statute book on the day we leave the EU.

The Act also gives Ministers powers to make regulations to prevent, remedy or mitigate any failure of EU law to operate effectively, or any other deficiency in retained EU law.

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 where appropriate 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.

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 Credit Institutions and Insurance Undertakings Reorganisation and Winding Up (Amendment) (Eu Exit) Regulations 2018’ statutory instrument.

Policy background and purpose of the SI

What do the underlying EU directives and UK law do?

The Credit Institutions (Reorganisation and Winding Up) Directive and Title IV of Directive 2009/138/EC (Solvency II) establish EEA wide frameworks for the reorganisation and winding up of EEA credit institutions and insurers. Under the Directives, the administrative or judicial authorities of the home Member State are granted exclusive jurisdiction for the reorganisation and winding up of institutions (which they have authorised) and their branches across the EEA, and any action they take is automatically recognised throughout the EEA. This means that the failed firm is treated as a single entity across the EEA by the home state’s reorganisation measure or during its winding up proceeding. The Directives also ensure that EEA creditors are notified, maintain their rights and ability to lodge a claim in another EEA state and are protected from discrimination based on their place of residence or the nature of their claims. Additionally, the Directives set out which law applies to certain rights and contracts. They also set out requirements for the co-operation and sharing of information between EEA competent authorities. The Directives were transposed into UK law in the Insurers (Reorganisation and Winding Up) Regulations 2004 (S.I. 2004/353), the Credit Institutions (Reorganisation and Winding Up) Regulations 2004 (S.I. 2004/1045), and the Insurers (Reorganisation and Winding Up) (Lloyd’s) Regulations 2005 (S.I. 2005/1998)

Deficiencies this SI remedies

This SI makes amendments to the implementing regulations.

This is because, in the unlikely scenario that the UK leaves the EU with no withdrawal agreement, EEA member states would treat the UK as a third country. The UK would not be included in the frameworks provided for in the Directives as it would no longer be an EEA member state.

This means that much of the detail of the implementing regulations, which provide for a reciprocal system between EEA Member States, would no longer be appropriate. Therefore, HM Treasury’s approach is to remove the provisions in UK law that conferred exclusive jurisdiction for and automatic recognition of EEA insolvencies. This will not affect the relevant UK insolvency law for UK firms or the normal tests for opening an insolvency proceeding in the UK.

Changes introduced by this SI include:

Removal of prohibition on UK winding up (and other related orders) of EEA firms

As set out above, HM Treasury’s approach is to remove the provisions in UK law that provided for the EEA’s frameworks for cross border insolvencies of credit institutions or insurance undertakings. The key change made by this SI as part of this, is the removal of the provisions that prohibit UK courts from making winding-up or administration order against EEA credit institutions, insurers, investment firms and group companies. Currently, the prohibition is based on the principle of EEA States granting the home state of the institution exclusive jurisdiction, on a reciprocal basis across the EEA. This principle will not be extended to the UK after exit in a no-deal scenario, and thus it is not appropriate to retain it in UK law. The effect of removing this prohibition will mean that for insolvencies which commence after exit day it will be possible for such an order to be made by UK courts in respect of a failed EEA firm if the normal UK jurisdictional and insolvency tests have been met.

Removal of automatic recognition

At present, EEA insolvency measures have effect in the UK in respect of the branches, property or debt of credit institutions, insurers, investments firms and group companies as if they were part of the general law of insolvency of the UK. This operates on a reciprocal basis across the EEA. As other EEA Member States will not extend this treatment to the UK after exit in a no-deal scenario, it is not appropriate to retain it in UK law.

Removal of EEA preferential treatment

The implementing regulations currently provide that certain contracts or rights within a reorganisation or winding-up should be dealt with under the law of an EEA Member State. These amount to a form of preferential treatment for EEA countries, and it is thus not appropriate to retain them after exit.

However, this approach will not affect the provisions that allow for any applicable law (English, EEA, or otherwise). Such applicable law provisions are being retained and not removed by this SI, these include the creditors’ right to set off, regulated market transactions, (for credit institutions) repurchase agreements and netting agreements.

Notification, publication and language requirements

Currently, in line with the Directives, there are requirements on UK authorities to notify relevant EEA regulators when a court makes a decision, order or appointment as part of an insolvency. As the Directives will no longer apply to the UK, when the UK leaves the EU, EEA regulators would not be required to notify UK authorities in these circumstances. Therefore, these obligations on UK authorities will be removed. Instead, UK authorities will rely on the existing domestic framework for cooperation and information sharing with third countries, which allows for this on a discretionary basis.

Moreover, the SI removes provisions requiring the publication of arrangements and orders in the Official Journal of the European Union. The general UK corporate insolvency law requirements to publish such information will not be affected by this SI. Equally, creditors can currently submit claims in a language other than English providing it is the official language of an EEA state. Such provisions are also being removed.

The Bank Recovery and Resolution Directive and the Credit Institutions (Reorganisation and Winding Up) Regulations (2004)

For credit institutions, investment firms and group companies HM Treasury recognises the interactions with resolution. HM Treasury’s approach to on-shoring the Bank Recovery and Resolution Directive maintains the UK’s ability to recognise third country resolution under section 89H of the Banking Act 2009. HM Treasury has set out more details on this approach here.

Transitional and savings provisions

For the purpose of certainty for market participants, HM Treasury recognises that it is necessary to make provision for insolvency measures which are ongoing at the time of the UK’s exit from the EU. The greatest certainty is continuation of the status quo. Thus this SI establishes that where a credit institution, insurer, investment firm or group company is subject, on exit day, to a directive reorganisation measure or winding-up proceeding which was begun before exit day the current law will continue to apply to that insolvency.

However, this provision is subject to a safeguard. This is that, where a court determines that one of three conditions is met, the status quo will not continue and so there will be no prohibition on commencing UK insolvency proceedings, or requirement to automatically recognise EEA proceedings. These conditions are that an ongoing EEA measure or proceeding will have an adverse effect on financial stability in the UK, that UK creditors would not receive the same treatment as creditors located in the EEA, or that continuation of the status quo would be unlawful under the Human Rights Act 1998.

This SI also contains safeguarding provisions in relation to an ongoing EEA-led credit institution insolvency process which protects the operation of certain financial markets. These provide that an EU insolvency officer cannot take action in the UK that is inconsistent with the protections in the UK settlement finality and financial collateral framework.

These provisions do not apply to resolution actions which are ongoing at the time of the UK’s exit from the EU. HM Treasury has made transitional provisions for such actions in the Bank Recovery and Resolution (BRR) EU Exit SI. Specifically, Regulation 8 of the BRR EU Exit SI confirmed that Section 89H of the Banking Act 2009 does not apply to resolution action taken in EEA states other than the UK before exit day. The effect of this is that such resolution actions continue to be recognised automatically.

Relevant Rulebook and Binding Technical Standard changes

There are no Rulebook or Binding Technical Standard changes planned in this area.

Stakeholders

The stakeholders who will be interested in the instrument could include: insurance, reinsurance firms, banks, building societies, investment firms, banking group companies and central counterparties. Shareholders, depositors and debtholders in these institutions will also be interested, as well as any individual, firm or group that is a market participant or involved in the application of insolvency law in the financial sector. 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.

Next steps

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

Further information

Read HM Treasury’s approach to financial services legislation under the European Union (Withdrawal) Act 2018 (PDF, 212KB).

Read HM Treasury’s explanatory policy note on the draft Bank Recovery and Resolution (Amendment) (EU Exit) Regulations 2018

Read HM Treasury’s policy note on draft Solvency II and Insurance (Amendment etc) (EU Exit) Regulations 2018.

Enquiries

If you have queries regarding this instrument, email FSlegislationEUWA@hmtreasury.gov.uk.