Brexit Watch #6: Seeing past the fog of uncertainty – How are the regulators responding?

Tue 29 Oct 2019

The British political landscape has been unsettled and uncertain. Boris Johnson defeated Theresa May in July 2019 to become Prime Minister with his “do or die” conviction for the UK’s exit from the EU, with or without a deal.

While the Government has been successful in achieving Parliament’s support for a renegotiated withdrawal deal, MPs rejected the prime minister’s push to implement the new bill within the short timeframe leading up to 31 October 2019.

Although the EU leaders have agreed, in principle, to extend Brexit until 31^st January 2020, uncertainty still looms and proposals are on the table for an early election in December. Nevertheless, regulators have accounted for multiple scenarios by taking steps to soften the foreseeable market disruption.

This article looks at the steps taken by the UK and EU regulators to provide financial institutions with certainty and stability amidst political turmoil.

FCA accelerates efforts to ensure the stability of financial services and mitigate the expected impacts from a no-deal Brexit – 11 September 2019

The FCA has boosted efforts to ensure financial institutions are aware of additional measures that need to be undertaken to prepare for a potential no-deal Brexit. The FCA states that “Firms who have not prepared appropriately may risk an impact on their business”. The FCA will run a series of digital adverts signposting the FCA Brexit webpages , and has set up a dedicated telephone line (0800 048 4255). The Brexit-related information provided by the FCA is particularly relevant for any firm that:

• is a UK business doing any business in the EEA
• passports its products/services into the UK and has not notified the FCA for entry into the Temporary Permissions Regime
• has consumers in the EEA
• transfers personal data from the EEA

The FCA expects firms to consider any regulatory changes that may come into force in the event of a no-deal. The FCA provides an example with implications for MiFID II transition reporting regulations and encourages firms to be ready for immediate implementation.

_{Source: https://www.fca.org.uk/news/press-releases/fca-steps-efforts-ensure-firms-are-getting-ready-no-deal-brexit}

FCA and Securities and Futures Commission of Hong Kong (SFC) amend Memorandum of Understanding (MoU) to include mutual recognition of funds – 12 September 2019

To ramp up preparation in the event of a no-deal Brexit, the FCA and SFC have amended their MoU first signed in October 2018. The addendum aims to set out roles and responsibilities of the respective bodies in order to enhance cooperation relating to:

1. Collective investment schemes domiciled in either Hong Kong or the United Kingdom (UK) and offered to the public in the UK and/or Hong Kong on a cross border basis; and
2. Management companies of collective investment schemes, based in either Hong Kong or the UK.

_{Source: https://www.fca.org.uk/publication/mou/fca-sfc-first-addendum-mrf-mou.pdf}

EU financial regulators highlight risks of a no-deal Brexit – 12 September 2019

The EU financial regulators published a joint committee report titled “Risks and Vulnerabilities in the EU Financial System”. The committee, made up of  European Insurance and Occupational Pensions Authority (EIOPA), European Banking Authority (EBA) and European Securities and Market Authority (ESMA), reports the risks arising from the UK’s decision to withdraw from the EU as key for the EU financial system. The report further notes that “There seems to be a “Brexit fatigue” in the financial sector, supervisors continue to encourage institutions to prepare contingency plans for a no-deal Brexit and have themselves set further steps in motion to minimise negative impact on financial markets. “

The committee strongly recommends that market participants undertake robust policy actions, particularly around contingency planning assurance of business continuity in the event of a no-deal Brexit. They urge firms to have plans implemented by 31 October at the latest.

The report explains that the EBA has been actively preparing for post-Brexit cooperation agreements through MoUs with a three-fold focus on cooperation among supervisors, cooperation among resolution authorities, and cooperation between the EBA and the UK authorities.

_{Source: https://eiopa.europa.eu/Publications/Reports/Joint%20Committee%20Autumn%202019%20Risk%20Report.pdf}

_{https://eiopa.europa.eu/Pages/News/EU-financial-regulators-highlight-risks-of-a-no-deal-Brexit-and-search-for-yield.aspx}

Andrew Bailey, Chief executive of FCA, delivers a speech urging EU financial regulators to implement measures to minimise market disruption in the event of a no-deal Brexit. – 16 September 2019

On 16 September 2019, the FCA published a speech delivered by Andrew Bailey which reiterated the FCA’s efforts to “prepare for a full range of possible outcomes and scenarios” relating to the UK’s exit from the EU.

Mr Bailey called upon his EU counterparts to put in place exemptions and equivalence permits to minimise disruption of the EU derivatives markets in the event of a no-deal Brexit in October 2019.  At present, the temporary equivalence given by the EU is valid only until March 2020 and the EU has not provided any concrete arrangements beyond that date should Brexit be further delayed. In Mr Bailey’s view, an extension beyond the current deadline of March 2020 would be needed in order to avoid the extra costs that EU firms will have to bear to move large number of positions held by EU entities at UK CCPs.

_{Source: https://www.fca.org.uk/news/speeches/preparing-brexit-financial-services-state-play?_sm_au_=iHVsl02ZMDQ2BqJs}

European Commission offers reassurances to EU derivatives market participants following FCA’s warnings – 19 September 2019

On 19 September, Patrick Pearson, Head of Financial Markets Infrastructure and Derivatives at the European Commission attempted to reassure participants of EU derivative markets with respect to the status of UK clearing houses in the case of a no-deal Brexit. The assurance came as a response to warnings and concerns raised by Andrew Bailey, Chief Executive of FCA, in a speech delivered on 16 September.

Patrick Pearson stated that the  temporary exemption for UK clearing houses still holds until 30 March 2020 as per the original agreement contingent on the UK Exit day being March 29 2019. This has raised a cause for concern as this extension does not reflect the postponement of UK exit to 31 October 2019 and would give market participants an exemption of only five months rather than the agreed upon 12 months.

The senior EU commission official further added that EU regulatory bodies are quick to implement critical decisions as required and “ESMA is ready to recognise any UK CCPs in the event of the UK leaving before the 31 March next year.”

_{Source: https://www.risk.net/regulation/7011006/eu-seeks-to-offer-reassurance-on-brexit-clearing-exemption?utm_medium=email&utm_campaign=RN.Daily.DU.A.M F0600&utm_source=RN.Daily&im_amfcid=17510106&im_amfmdf=f024f6e8d43a10c574173dddb936540e}

FCA publishes updates to directions under the Temporary Transitional Power (TTP) – 26 September 2019

On 26 September, the FCA announced updates to its directions for firms under its Temporary Transitional Power (TTP). These drafts update the directions made under the TTP on 28 March 2019, which include:

1. The FCA has confirmed that it intends to extend the proposed duration of the directions to 31st December 2020.
2. The FCA has updated provisions relating to prudential requirements to reflect new HM treasury legislation and FCA exit instruments published since March 29, 2019.
3. The FCA has also applied a standstill direction to allow for EEA Central Banks and the European Central Bank, continued reliance upon their status as exempt persons until 31 December 2020.

The FCA states that the updates are “intended to reduce risk of disruption for firms in a no-deal scenario while ensuring consumers remain appropriately protected and markets continue to work well”

However, there are certain areas for which firms will have to prepare to make changes on exit day:

1. firms subject to the MiFID II transaction reporting regime, and connected persons
2. firms subject to reporting obligations under European Market Infrastructure Regulations (EMIR)
3. EEA Issuers that have securities traded or admitted to trading on UK markets
4. investment firms subject to the Bank Recovery and Resolution Directive (BRRD) and who have liabilities governed by the law of an EEA State

FCA publishes its updated expectations for firms on Brexit – 11 October 2019

On 11 October 2019, the FCA published an update on steps certain firms will need to take in the event of a no-deal Brexit on 31 October 2019.  This update provides guidance to firms in order to minimise operational disruption and challenges arising from the UK leaving the EU during the working week.  Key points include:

1. EEA passporting firms that wish to continue operating in the UK will need to notify the FCA by 30 October that they wish to enter the Temporary Permissions Regime (TPR). Fund managers had until 16 October 2019 to inform the FCA if they want to make changes to their existing notification.
2. The firms that have notified the FCA of their intention to enter the TPR will be provided with a landing slot during which they will need to submit an application to attain full UK authorisation.
3. In relation to MiFID Transaction Reporting, the FCA has provided guidelines for firms that would be unable to comply fully with the regime at the time of the UK’s official withdrawal. In this situation, firms will need to be able to back report missing, incomplete or inaccurate transactions. This should be completed as soon as possible after 31 October 2019.
4. In relation to EMIRT reporting, the FCA registered Trade Repositories (TRs) and UK reporting counterparties should ensure any trades which cannot be reported before the point of exit on 31 October, are reported to UK authorities no later than 4 November 2019.

_{Source https://www.fca.org.uk/news/press-releases/fca-sets-out-latest-expectations-firms-brexit}

IN SUMMARY

While the negotiations for a Brexit deal appear to have picked up momentum, nothing is agreed until everything is agreed and regulators continue to urge organisations to prepare for a wide range of scenarios. They need to have strategies in place to mitigate all the risks that will materialise post Brexit.