The suite of documents published earlier this week from the Treasury and the FCA reveal three key trends – a willingness to diverge from EU regulation while maintaining similar regulatory outcomes; a clear intention to make regulators accountable for competition and economic recovery while meeting their wider regulatory objectives such as financial stability and consumer protection; and some measures to tackle implementation barriers and scope of new regulation.

Implications for firms

There are some immediate implications for financial services firms:

monitor upcoming consultations on these divergences (an initial list is set out below) and provide feedback;

- any risk and compliance transformation programmes, specifically focussed on digitisation and automation, should allow for these impending changes;

- in-flight regulatory change programmes (such as LIBOR/ Benchmark regulation) should note specific changes proposed; and

- for cross-border firms, compliance functions will need to factor in divergence in the detail between UK and EU27 regimes post the transition period.

Highlights from the announcements earlier this week include:

Accountability framework for regulators

HMT proposes the creation of an “enhanced accountability framework”, providing the FCA and PRA with greater powers in the rule-making process related to the new regimes, but with increased direction from HMT to ensure that the regulators have regard to competitiveness, ability to support lending in UK markets and equivalence when making rules for these regimes. This clearly rules out a “cut and paste” approach to adopting any EU legislation that goes live after the transition period. However the broader commitment to comply with international regulatory standards seeks to alleviate any fears around dilution of the regulatory framework going forward.

Divergence post December 2020

The Withdrawal Act automatically adopts any EU regulation that “goes live” before December 2020 (the end of the transition period). For EU regulation that is due to go live after December 2020, the UK will diverge from the EU’s regulatory regime, but will do so in a way which aims to achieve “equivalent regulatory outcomes” and so keeps the UK regime broadly equivalent to the EU's.

The areas where there are proposed changes include the following:

  • Amendments to the Benchmarks Regulation - HMT will publish a policy statement in July 2020, and the FCA published a call for input on the topic;
  • Amendments to the Market Abuse Regulation, to confirm and clarify that both issuers and those acting on their behalf must maintain their own insider lists and to change the timeline issuers have to comply with when disclosing certain transaction undertaken by their senior managers;
  • Improvements to the functioning of the PRIIPs regime in the UK to address potential risks of consumer harms;
  • Completion of the implementation of EMIR (REFIT), to improve trade repository data and ensure that smaller firms are able to access clearing on fair and reasonable terms;
  • Consideration of the future approach to the UK’s settlement discipline framework, given the importance of ensuring that regulation facilitates the settlement of market transactions in a timely manner while sustaining market liquidity and efficiency. As such, the UK will not be implementing the EU’s new settlement discipline regime, set out in the Central Securities Depositories Regulation, which is due to apply in February 2021. UK firms should instead continue to apply the existing industry-led framework;
  • Confirmation that the UK will not be taking action to incorporate into UK law the reporting obligation of the EU’s Securities Financing Transactions Regulation for non-financial counterparties (NFCs), which is due to apply in the EU from January 2021. Given that systemically important NFC trading activity will be captured sufficiently through the other reporting obligations that are due to apply to financial counterparties, it has been deemed appropriate for the UK not to impose this further obligation on UK firms; and
  • Review of certain features of the Solvency II regime - these will include, but will not be limited to, the risk margin, the matching adjustment, the operation of internal models and reporting requirements for insurers. The Government expects to publish a Call for Evidence in Autumn 2020. Insurers may want to read our paper on Solvency II divergence which predicted the direction of travel set out in the Chancellor's statement. In addition to the Solvency II reform favourites of risk margin, matching adjustment and reporting, the Chancellor’s statement refers intriguingly to model approval. This may presage some move away from Solvency II’s pass/fail approach and towards the banking side’s approach of flexible add-ons and conditionality within the approval process coupled with the application of “guard rail” minima to prevent modelled capital requirements falling below a certain level.

Unfortunately there is very little detail on the proposed changes - the consultations over the next few months should provide further information on the extent and scope of these proposed changes.

Systemic investment management firms

  • Targeted deviations will be applied to adopting prudential regulation such as IFR and CRDII. One such deviation will be for UK systemic investment firms, who are already prudentially regulated and supervised under CRR/CRD. Unlike the EU, HMT and the PRA do not intend to require such firms, which will be PRA-designated investment firms, to re-authorise as credit institutions.
  • Investment firms are currently subject to similar prudential regulation as banks and other credit institutions. However, the publication of the FCA’s discussion paper signals a move towards a separate UK investment firms prudential regime; one that is distinct from banking and credit firms and divergent, but seeking to achieve similar outcomes to the EU’s own forthcoming investment firms prudential rules. This offers the UK the opportunity to diverge from elements of both the existing banking regime and the EU’s own proposed new rules. In doing so, the UK may look to craft a simpler and more bespoke set of rules which are more tailored to the needs of investment firms and the UK market, and these may, in turn, increase the attractiveness of the UK for asset managers.

LIBOR and Benchmark Regulation

HMT intends to bring forward legislation to amend the Benchmarks Regulation (BMR) to give the FCA enhanced powers that could help manage an orderly wind-down of critical benchmarks such as LIBOR, and, in particular, help deal with the problem identified by the Working Group of ‘tough legacy’ contracts that genuinely have no or inappropriate alternatives and no realistic ability to be re-negotiated or amended. Our LIBOR blog looks into this further.

HMT will also approve legislation to empower the FCA to direct the administrator of LIBOR to change the benchmark methodology, if doing so would protect consumers and market integrity. It would essentially allow the FCA to stabilise certain LIBOR rates during a wind-down period so that limited use in legacy contracts could continue. HMT plans to set out further detail on upcoming legislation which will include amendments to the Benchmarks Regulation to ensure continued access to third country benchmarks until end-2025. It will publish a statement on this in July 2020.

Conclusion

The extent of targeted deviations from EU regulation will only be revealed over the course of the next few months when consultation papers are released – some of these will undoubtedly be long standing issues where the UK has previously expressed its desire to deviate. What is clear is the intention to make financial services regulation work for UK firms. Clearly this will be a fine balancing act that will be influenced by many factors, including equivalence and market access, and the broader state of the economy.