Ring-Fenced Bodies (Amendment) (EU Exit) Regulations 2018: explanatory information
Updated 29 October 2019
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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. The changes made in this SI would not take effect on 29 March 2019 if, as expected, we enter an implementation period.
2. Notice
This policy note 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 and will be published in due course. 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?
From 1 January 2019, UK legislation will require banks and banking groups which carry on one or more core activities and which hold more than £25 billion in core deposits to separate core retail banking from investment banking. This regime is a UK initiative referred to as ‘ring-fencing’ which currently applies to UK banking groups. The ring-fencing regime is intended to provide greater protection to consumers so that a bank’s investment banking activities do not adversely affect consumers’ access to retail banking products. As part of this protection, the ring-fencing regime imposes restrictions on the products a Ring-Fenced Body (RFB) can offer to consumers. Additionally, the ring-fencing regime limits where an RFB may conduct business. Subject to certain exceptions, under current legislation RFBs must not own a banking subsidiary or branch which is located outside the EEA.
The framework for ring-fencing is set out in the Financial Services (Banking Reform) Act 2013; specifically, this inserted Part 9B into the Financial Services and Markets Act 2000. This primary legislation provides for the separation of core activities, which include deposit taking, from excluded activities in an RFB’s operations. In particular, the Financial Services and Markets Act 2000 (Excluded Activities and Prohibitions) Order 2014 (the EAPO) defines what activities RFBs may not do by reference to other provisions in UK and EU legislation.
3.2 Deficiencies this SI remedies
The ring-fencing regime is a UK initiative implemented through domestic legislation and is not itself an implementation of EU requirements. As such, the policy approach and scope of the ring-fencing framework will remain workable after the UK has left the EU. However, some of the definitions of permitted and prohibited activities in relation to ring-fencing were drafted to reflect the UK’s place as part of the EU single market for financial services. Once the UK has left the EU, some of these definitions will be deficient. In order to ensure that ring-fencing requirements continue to operate as they do now, amendments to some definitions in ring-fencing legislation will be needed. Specifically, this SI will make amendments to the EAPO and other relevant domestic legislation to ensure that the UK’s ring-fencing regime continues to operate as it currently does in a no-deal scenario.
Amendments made through the SI will ensure that RFBs can continue to operate through a branch or subsidiary in the EEA in a no-deal scenario. As many banks have undertaken significant work to restructure their operations before the ring-fencing regime comes into effect on 1 January 2019, it is appropriate to maintain the current position after exit day in order to minimise disruption to UK banks. Prohibiting RFBs from having EEA branches and subsidiaries would have negative financial and operational impacts on UK banks and could result in the closure of some EEA branches. The independent statutory review of the ring-fencing regime is due to commence in 2020-21, which may serve as an appropriate opportunity to reassess the UK’s ring-fencing policy.
The EAPO defines certain financial services terms and activities, such as derivative instruments and insurance undertakings, by cross-referring to EU Directives and Regulations. Additionally, the legislation defines certain financial bodies, such as credit institutions and investment firms, by cross-referring to EU law. Amendments made through the SI will ensure that these definitions continue to maintain EEA-wide scope so that the ring-fencing regime remains unchanged on exit day. In some instances, this involves making consequential amendments as a result of other Brexit SIs which the government is preparing as part of its no-deal contingency planning.
3.3 Relevant Rulebook and Handbook changes
The FCA and PRA will be updating their Handbook/Rulebook to reflect the changes introduced through this SI, and to address any deficiencies due to the UK leaving the EU. Find further details of the FCA’s approach and details of the PRA’s approach. The FCA and the PRA have confirmed their intention to consult on these changes in the autumn.
3.4 Stakeholders
This SI does not have any impact on firms as the scope of the UK’s ring-fencing regime will not change as a result of the UK’s withdrawal from the EU. This means that RFBs, including EEA branches and subsidiaries of these banks, will be unaffected by any changes introduced through this SI. 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.
4. Next steps
HM Treasury plans to lay this instrument before Parliament before exit.
5. Further information
6. Enquiries
If you have queries regarding this instrument, email FSlegislationEUWA@hmtreasury.gov.uk.