Guidance

Update: Financial Services EU Exit Statutory Instruments

Published 15 October 2020

The United Kingdom left the European Union (“EU”) on 31 January 2020 (“exit day”). The Withdrawal Agreement agreed between the UK and EU provides for a Transition Period which ends at 11pm on 31 December 2020. During the Transition Period, EU law continues to apply to the UK under the terms set out in the Withdrawal Agreement. At the end of the Transition Period, EU law will cease to apply in the UK and the European Union (Withdrawal) Act 2018 (“the 2018 Act”), as amended by the European Union (Withdrawal Agreement) Act 2020 (“the 2020 Act”), converts the existing body of directly applicable EU law into UK domestic law, and preserves UK laws relating to EU membership (for example, legislation implementing UK Directives). This body of law is known as “retained EU law”. The purpose of this is to provide a functioning statute book at the end of the Transition Period.

The 2018 Act, as amended by the 2020 Act, also gives Ministers powers to make secondary legislation (Statutory Instruments) to prevent, remedy or mitigate any failure of retained EU law to operate effectively, or any other deficiency in retained EU law arising as a result of EU withdrawal. HM Treasury refers to this process for financial services legislation as “onshoring”.

Prior to exit day, HM Treasury made over 50 EU Exit instruments under the 2018 Act to ensure the UK’s financial services regulatory regime stood ready for all scenarios at exit day. The majority of these instruments were originally due to take effect on exit day. This included introducing a range of temporary permissions and transitional regimes to minimise any disruption to firms and consumers as the UK left the EU.

The 2020 Act delayed those parts of these EU Exit instruments that would have come into force by reference to exit day (for instance, “on exit day” or “immediately before exit day”) so they instead come into force by reference to “IP completion day” (the legal term, defined in the 2020 Act, for the time and date on which the Transition Period ends).

The general rule delaying the commencement dates did not apply to a number of the financial services temporary permissions and transitional regimes, because these had commenced prior to exit day in order for the UK regulators and affected firms to begin to prepare for exit day. Earlier this year, HM Treasury brought forward secondary legislation under the 2020 Act, to ensure that the temporary permissions and transitional regimes will now apply as intended by reference to the end of the Transition Period.

The 2020 Act did not make any general amendment to “exit day” or specific dates that may be referenced within the substantive provisions of EU Exit instruments.

As a result, HM Treasury will bring forward further secondary legislation under the 2020 Act to update references to exit day and other dates within the substantive provisions of Financial Services EU Exit instruments, to ensure that they operate as intended from the end of the Transition Period. Consistent with the approach taken to the temporary permissions and transitional regimes, it is HM Treasury’s intention to amend references to “exit day” in substantive provisions within the EU Exit instruments to instead read “IP completion day”, unless there is a reason for not making this amendment. Other characteristics of the EU Exit instruments will remain unchanged (for example, references to time periods will remain the same in length, subject to the exceptions noted below, so a reference to “one year from exit day” will become “one year from IP completion day”). This approach will provide maximum certainty for firms and consumers at the end of the Transition Period.

This legislation will also shift the application of the Temporary Transitional Power, such that it is available for use by the UK regulators for a period of two years from the end of the Transition Period, as set out in a Written Ministerial Statement on 25 March 2020.

Within HM Treasury’s previous EU Exit instruments, there are also a number of references to specific dates. In the vast majority of cases, these are references to specific dates within the underlying EU regulations that will be retained at the end of the Transition Period by virtue of the 2018 and 2020 Act, and therefore it would not be appropriate to amend these dates. However, there are some exceptions to this, and in further secondary legislation brought forward by HM Treasury today (15 October 2020), the following amendments have been made:

• In the Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2019, HM Treasury established a temporary intragroup exemption from clearing and margin requirements for over-the-counter derivative transactions. This meant that any existing intragroup exemptions between UK firms and both their EU and third country group entities (where no equivalence has been granted) before exit, could continue in the case of a no-deal exit. In line with the general approach set out in this note, the UK’s temporary intragroup exemption regime is being amended to come into force at the end of the Transition Period. However, in relation to the clearing obligation, the EU’s derogation from the need to have EMIR Article 13 equivalence expires on 21 December 2020 which, if not extended, means those who were exempt in the EU regime will not be captured by the UK regime. HM Treasury has therefore made an amendment in the Securities Financing Transactions, Securitisation and Miscellaneous Amendments (EU Exit) Regulations 2020, laid before Parliament today (15 October 2020), to ensure that all UK firms who are currently benefitting from an intragroup exemption from the clearing obligation pursuant to the EU derogation on or after 21 December 2020 will also automatically have an exemption in the UK’s temporary regime, as was the original policy intention.

• For intragroup exemptions from margin requirements, the EU’s derogation expired on 4 January 2020 and was never formally extended. Therefore, UK firms, with intragroup transactions with non-EU group entities where no equivalence has been granted, will need to notify the Financial Conduct Authority (“FCA”) in order for exemptions from the previous EU regime to continue under the UK’s temporary regime. The FCA will set out further details on the notification process in due course. HM Treasury expects the process to be streamlined in order to minimise the burden on firms transitioning from the EU to the UK regime, and there is a strong expectation of an identical outcome for all firms impacted by this process.

• Certain cross-references in previous EU Exit instruments will need to be updated. For example, where there are cross-references to EU regulations as they stood from when a particular EU Exit instruments was made, HM Treasury will, where appropriate, update these references to instead refer to the version of the EU regulation as it forms part of retained EU law (which comes into existence at the end of the Transition Period under the 2018 Act). This will ensure that, when HM Treasury’s EU Exit instruments come into force at the end of the Transition Period, they will not refer to outdated versions of underlying EU regulations.

HM Treasury has brought forward further SIs to prepare for the end of the Transition Period. In particular, as new EU legislation has become applicable to the UK during the Transition Period, HM Treasury has made further SIs to ensure the legislation continues to operate effectively in the UK at the end of the Transition Period. As part of this process, HM Treasury has today (15 October 2020) laid the Securities Financing Transactions, Securitisation and Miscellaneous Amendments (EU Exit) Regulations 2020; the Bank Recovery and Resolution (Amendment) (EU Exit) Regulations 2020; and the Financial Holding Companies (Approval etc.) and Capital Requirements (Capital Buffers and Macro-Prudential Measures (Amendment) (EU Exit) Regulations 2020 to ensure that the UK has an independent, coherent and effective financial services regulatory and legal regime at the end of the Transition Period.