Brexit update for financial services firms - week ending 12 April 2019

United Kingdom

In outline:

On 11th April the EU published the text of the decision of the European Council in response to the UK’s request for a further extension of the Article 50 notice period (see Document 1 below and the UK acceptance at Document 2 below). The decision provides a second extension and delays the UK’s exit from the EU which is now due to take place at midnight (at 11.00 pm UK time) on 31st October 2019. The decision has two provisos which could result in an earlier exit date. First, the decision references the terms of Article 50(3) which allows for exit before the notice expires where both the EU and the UK complete their ratification of the Withdrawal Agreement (WA); in that case, exit would take place on the 1st day of the month following ratification. This ‘flextension’ element would only be possible if the UK Parliament approved the WA (and presumably passed the legislation to implement it) before October. Second, the decision itself provides that exit will take place on 31st May 2019 if the UK has not held European Parliament elections and has not ratified the WA by 22 May 2019. This leaves a short window for WA ratification if the UK is to avoid holding EP elections and avoid a ‘no deal’ exit.

The threat of a ‘no-deal’ exit is therefore deferred until 31st May and, if EP elections are held, to 31st October 2019.

The terms of the decision do not preclude a further extension by the European Council but there is certainly no guarantee that a significant third extension would be offered by the EU-27. The terms of the latest decision reflect concerns about extending the UK’s status as an exiting EU member. It notes that until exit the UK will remain an EU member with full rights and obligations (including the right to revoke its notice under Article 50) and notes commitments given by the UK to act in a constructive and responsible manner throughout the extension period in accordance with its duty of sincere cooperation. The UK is to facilitate the achievement of the Union’s objectives, when participating in Union decision making and is expected to act in a manner consistent with a withdrawing member state. The decision, which provides for a progress review at the European Council meeting in June, emphasises that the UK’s actions during the extension ‘should be compatible with the letter and the spirit’ of the WA, ‘and must not hamper its implementation. Such an extension cannot be used to start negotiations on the future relationship.’

A version of the WA with consequential amendments was also published (see Document 4 below). As the covering letter emphasises, the necessary changes to certain dates are very minor. In particular, the date for the end of the transition period on 31 December 2020 is not to be changed. If the WA does take effect, the transitional period will therefore be shorter than the original 21 months.

A UK statutory instrument (see Document 3 below) changed the exit date under the European Union (Withdrawal) Act 2018 to 31st October 2019 and the FCA announced that it would not be implementing its no-deal measures for an exit on 12 April (see Document 5 below).

The FCA also took steps to adjust its no deal regime to reflect the Article 50 extension (see Document 6 below). These changes cater for a 'no-deal' exit on the earlier of the extension dates above, i.e. on 31 May 2019. The window for applications for the temporary permission regime now runs until 30 May 2019. The FCA updated its webpage and guidance and published various Directions (including directions on payments; emoney; UCITS; and AIFM).

The Australian Securities and Investments Commission and the FCA issued a press release (see Document 7 below) in which they announced a new MoU on trade repositories and an updated MoU on alternative investment funds. The announcement referred to HM Treasury's general policy of maintaining existing EU equivalence decisions under the UK's on-shored version of EU regulation and confirmed that the UK would maintain EU decisions on Australian equivalence for trading venues, OTC derivatives markets and credit rating agencies. The ASIC made a more general statement about its commitment to the recognition, where appropriate of the UK regime. These arrangements will not take effect until the UK leaves the EU single market.

Earlier in the week there were a few publications on no-deal preparations. Trade bodies had written a letter (see Document 8 below) setting out their concerns about the impact on derivative markets of the lack of recognition of EEA derivative trading venues under the UK’s on-shored no deal versions of EMIR/MiFIR (unless FCA granted transitional relief). Some of the associations had previously written to the European Commission about the lack of EU recognition - see our update of 8 March 2019.

On 10 April 2019, (before the summit meeting) the European Commission published a press release (see Document 10 below) summarising its preparation to date for a no deal scenario. Financial Services was not one of the 5 key areas the Commission offered guidance on but in an Annex it summarised the EU's no-deal regime for financial services: "Financial services: temporary, limited measures to ensure that there is no immediate disruption in the central clearing of derivatives, central depositaries services for EU operators currently using UK operators, and for facilitating novation, for a fixed period of 12 months, of certain over-the-counter derivatives contracts, where a contract is transferred from a UK to an EU27 counterparty."

We will now be taking a pause in our weekly Brexit coverage. Brexit related news will still be available via the RegZone subscription service (daily or in a weekly digest). After the Easter holiday, we will report on Brexit related issues as they arise, and will restart our weekly updates if and when firms needs to re-focus on Brexit developments.

1. EC: Extension of Article 50

The European Council published its Conclusions from the Special Meeting of the European Council and its Decision to extend Article 50. Donald Tusk also commented at the conclusion of the summit.

"The European Council takes note of the letter of Prime Minister Theresa May of 5 April 2019 asking for a further extension of the period referred to in Article 50(3) TEU.

"In response, the European Council agrees to an extension to allow for the ratification of the Withdrawal Agreement. Such an extension should last only as long as necessary and, in any event, no longer than 31 October 2019. If the Withdrawal Agreement is ratified by both parties before this date, the withdrawal will take place on the first day of the following month.

[…]

"The European Council stresses that such an extension cannot be used to start negotiations on the future relationship. However, if the position of the United Kingdom were to evolve, the European Council is prepared to reconsider the Political Declaration on the future relationship in accordance with the positions and principles stated in its guidelines and statements, including as regards the territorial scope of the future relationship.

The European Council notes that, during the extension, the United Kingdom will remain a Member State with full rights and obligations in accordance with Article 50 TEU, and that the United Kingdom has a right to revoke its notification at any time."

Donald Tusk commented: “Tonight the European Council decided to grant the United Kingdom a flexible extension of the Article 50 period until the 31st of October. This means an additional 6 months for the UK. During this time, the course of action will be entirely in the UK's hands. It can still ratify the Withdrawal Agreement, in which case the extension will be terminated. It can also reconsider the whole Brexit strategy. That might lead to changes in the Political Declaration, but not in the Withdrawal Agreement. Until the end of this period, the UK will also have the possibility to revoke Article 50 and cancel Brexit altogether.

"The UK will continue its sincere cooperation as a full member state with all its rights, and as a close friend and trusted ally in the future.

"Let me finish with a message to our British friends: this extension is as flexible as I expected, and a little bit shorter than I expected, but it's still enough to find the best possible solution. Please do not waste this time."

2. Department for Exiting the EU: Extension of Article 50

The UK Government's formal acceptance of the extension can be found here."I refer to the draft European Council Decision taken in agreement with the United Kingdom extending the period under Article 50(3) TEU, as attached to this letter. I am writing to confirm the agreement of the Government of the United Kingdom to the extension of the period under Article 50(3) and to this decision."

3. The European Union (Withdrawal) Act 2018 (Exit Day) (Amendment) (No. 2) Regulations 2019/859

This SI has been made. The Explanatory Memorandum explains that: "these Regulations amend the definition of “exit day” in section 20(1) of the European Union (Withdrawal) Act 2018 (hereafter “the 2018 Act”) from 12 April 2019 at 11.00 p.m. to 31 October 2019 at 11.00 p.m., and consequently amend section 20(2) of the 2018 Act. Various provisions of the 2018 Act, including the repeal of the European Communities Act 1972, and a wide range of primary and secondary legislation, take effect or come into force on “exit day”."

4. Department for Exiting the EU: Technical updates to the Withdrawal Agreement

The Department for Exiting the EU has published correspondence between the EU and UK setting out and confirming technical updates to the Withdrawal Agreement reflecting the extension of Article 50 beyond 29 March 2019. The correspondence comprises a letter from the EU to the UK and a letter from the UK to the EU. The updated text of the Withdrawal Agreement can also be downloaded from a new webpage.

The webpage explains that: "This is an exchange of letters between the European Commission and the UK setting out and confirming technical updates to the Withdrawal Agreement reflecting the extension of Article 50 beyond 29 March 2019. Also included is an updated copy of the Withdrawal Agreement reflecting these updates."

5. FCA: brexit update

FCA's short press release notes that it will not implement its preparations for Brexit this weekend, stating that firms do not need to take any action or implement any contingency plans. "It has been confirmed the UK will not leave the EU on 12 April. The FCA will not implement its preparations for Brexit this weekend.

"Firms do not need to take any action or implement any contingency plans for this weekend. The FCA will provide updates when necessary on our website and through other channels."

6. FCA: Temporary permission regime for inbound passporting EEA investment funds

FCA has published this notification guide for firms, along with amended directions dated 11 April 2019. The guide can be accessed here and the directions can be accessed here (payments), here (emoney), here (UCITS), here (AIFM) and here (fsma).

The updated webpage states: "In light of the delay to the process of the UK’s withdrawal from the EU, the notification window for the temporary permissions regime will be extended and will now close at the end of 30 May 2019. We will keep this under review, and communicate any further changes as appropriate.

Any fund managers that, as a result of this extension, wish to update their notification should email recognisedcis@fca.org.uk by the end of 16 May 2019 at the very latest confirming this and including their FRN."

7. FCA/ASIC: MoUs

FCA and ASIC have agreed MoUs on trade repositories and AIFs in order to ensure continuity post-Brexit. Texts of the MoUs have not been published. The press release also states that HMT has confirmed that existing equivalence decisions granted in respect of Australia by the EC before exit day will generally be incorporated into UK law and will continue to apply post-Brexit. The UK will adopt existing EU equivalence decisions that relate to Australia’s supervisory and regulatory regime for trading venues, OTC derivatives markets and credit rating agencies.

Andrew Bailey, Chief Executive, FCA said: “The FCA and ASIC have always had a strong relationship, which will continue after Brexit. The MoUs we have agreed today will ensure the FCA and ASIC have uninterrupted exchange of information and can supervise cross-border activity of firms. They provide a strong signal to the markets that the UK will continue to play an important role after Brexit. The MoUs will also provide much-needed assurance to our regulated stakeholders.

“We also support the continuity of existing equivalence decisions which will minimise disruption for firms in the UK and Australia.”

James Shipton, Chair, ASIC said: “ASIC is pleased to have cooperation arrangements in place with the FCA on trade repositories and alternative investment funds. While the FCA and ASIC have always maintained a very close relationship on supervisory and enforcement matters, these two MOUs will enhance cooperation and information sharing between the authorities. Our commitment to ensuring the continuity of equivalence decisions will provide certainty to businesses and consumers and contribute to a fair, strong and efficient financial system.”

[…]

"Similarly, ASIC remains committed to take steps to provide, where appropriate, for continuing recognition post-Brexit of the equivalence of the UK’s regulatory and supervisory regime in relation to UK-based foreign financial services providers and market operators that operate in Australia under licences and exemptions or are otherwise recognised for the purposes of the Australian regulatory regime."

8. AFME/AIMA/Assosim/EFET/FIA/ICI Global/ISDA/SIFMA AMG/UK Finance: Equivalence of trading venues under EMIR and MiFIR

The trading associations have sent a letter to HMT urging UK authorities to adopt equivalence decisions regarding EEA trading venues under EMIR and MiFID. The letter also sets out concerns regarding the impact on UK market participants and derivatives markets in the event of a no-deal Brexit.

"In the absence of an equivalence determination by HM Treasury under Article 2a of EMIR UK with respect to EEA regulated markets, EEA exchange-traded derivatives (EEA ETDs) will be considered OTC derivatives under EMIR UK after the UK leaves the EU in a 'no-deal' scenario.

[…]

"As a result, there would be a significant adverse impact on UK non-financial counterparties (NFCs) currently under the EMIR clearing threshold and UK financial counterparties (FCs) with smaller positions in OTC derivatives:

  • Impact on UK NFCs. UK NFCs would need to include their positions in EEA ETDs (other than those entered into for risk-reduction purposes only) when determining whether they exceed the clearing threshold under EMIR UK. Exceeding the clearing threshold would significantly affect the ability of a UK NFC to risk manage its business because of the possible impact of collateral requirements on all its OTC derivatives transactions (including any unrelated interest rate or other derivatives entered into for hedging purposes). Therefore, it may need to reduce or limit its positions in EEA ETDs to ensure that it does not exceed the clearing threshold under EMIR UK after Brexit and become subject to clearing, margin and other requirements under EMIR. This may have a significant impact on its business model.
  • Impact on small UK FCs. UK FCs would have to aggregate their group's positions in EEA ETDs when determining whether they are 'small financial counterparties' that are exempt from the clearing obligation under EMIR REFIT as it applies in the UK (assuming that HM Treasury makes provisions applicable in the UK corresponding to the provisions of EMIR REFIT under its proposed powers under the Financial Services (Implementation of Legislation) Bill). Therefore, UK FCs may need to reduce or limit their positions in EEA ETDs to ensure that they do not exceed the clearing threshold under EMIR UK after Brexit and become subject to the clearing obligation under EMIR UK. This may significantly restrict a UK FC's ability to invest or risk manage its activities.

[…]

In the absence of an equivalence determination by HM Treasury under Article 28(4) of MiFIR UK with respect to EEA multilateral trading facilities (MTFs) and organised trading facilities (OTFs), UK FCs and UK NFC+s would, after the UK leaves the EU in a 'no-deal' scenario, cease to be able to execute transactions in OTC derivatives subject to the trading obligation under MiFIR on those venues. As a result:

  • UK banks and investment firms would not be able to access those EEA venues to service their clients or to risk manage their own positions;
  • Transactions between UK and EEA counterparties subject to their respective trading obligations may be subject to conflicting requirements, unless the EU recognises UK trading venues
  • Global liquidity would be fragmented across multiple venues."

9. EC: Delegated Regulations in relation to EMIR

The following have been published in the Official Journal: Commission Delegated Regulation (EU) 2019/564 of 28 March 2019 (available here) amending Delegated Regulation (EU) 2016/2251 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council as regards the date until which counterparties may continue to apply their risk-management procedures for certain OTC derivative contracts not cleared by a CCP and Commission Delegated Regulation (EU) 2019/565 of 28 March 2019 (available here) amending Delegated Regulation (EU) 2015/2205, Delegated Regulation (EU) 2016/592 and Delegated Regulation (EU) 2016/1178 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council as regards the date at which the clearing obligation takes effect for certain types of contracts.

10. EC: No deal Brexit preparedness

Ahead of the European Council's meeting of 10 April 2019, the EC sets out information on its no-deal preparations and notes practical guidance provided to Member States in a number of areas, including data protection. The press release can be accessed here.

"Since December 2017, the European Commission has been preparing for a ‘no-deal' scenario. To date, the Commission has tabled 19 legislative proposals 18 of which have been adopted or agreed by the European Parliament and Council (see ANNEX 1). Only one proposal on the EU budget for 2019 is to be finalised by the two co-legislators in due course. It will apply retroactively from the withdrawal date, once finalised. The European Commission also published 92 sector-specific preparedness notices with detailed guidance to the different sectors affected by Brexit.

"As outlined in the Commission's Brexit Preparedness Communications, the EU's contingency measures will not – and cannot – mitigate the overall impact of a ‘no-deal' scenario, nor do they in any way compensate for the lack of preparedness or replicate the full benefits of EU membership or the favourable terms of any transition period, as provided for in the Withdrawal Agreement. These proposals are temporary in nature, limited in scope and will be adopted unilaterally by the EU. They are not ‘mini-deals' and have not been negotiated with the UK.

"The Commission has also held extensive technical discussions with the EU27 Member States both on general issues of preparedness and contingency work and on specific sectorial, legal and administrative preparedness issues. The Commission has also completed a tour of the capitals of the 27 EU Member States. The aim of these visits was to provide any necessary clarifications on the Commission's preparedness and contingency action and to discuss national preparations and contingency plans. The visits showed a high degree of preparation by Member States for all scenarios."

The Commission summarises the Financial Services no-deal regime as "temporary, limited measures to ensure that there is no immediate disruption in the central clearing of derivatives, central depositaries services for EU operators currently using UK operators, and for facilitating novation, for a fixed period of 12 months, of certain over-the-counter derivatives contracts, where a contract is transferred from a UK to an EU27 counterparty."

Other publications from the RegZone Brexit news feed

FCA: Board minutes

FCA has published the minutes of its 28 February 2019 board meeting. Topics include: Brexit; rent-to-own price cap rules; increasing the FOS award limit and FCA business planning. The minutes can be found here.

HoC: EU preparations for a no-deal Brexit

This HoC Library briefing considers the preparations being made by the EU in the event of a no-deal Brexit, including with regard to the financial services sector. The briefing can be accessed here.

ESMA: Update on no-deal Brexit preparations

ESMA's press release notes that its statements and measures on no-deal Brexit scenario preparations referring to 12 April 2019 should now be read as referring to 31 October 2019. The press release can be found here.

PMO: Statements by Theresa May

Texts of Theresa May's statements to the European Council and to HoC of 10 and 11 April 2019 can be found here and here respectively.

EC: Speech by Valdis Dombrovskis

Text of this speech given on 11 April 2019 follows in which Valdis Dombrovskis discusses Brexit and the financial services sector.

EC: Invitation letter from Donald Tusk

Text of the letters sent to the members of the European Council (Art. 50) ahead of their special meeting on 10 April 2019 can be accessed here.

HoC European Scrutiny Committee: 62nd Report of Session 2017-19

Section 1 of the report considers UK contributions to the EU budget in 2019 in the event of a no-deal Brexit. The Committee has set out a number of conclusions and recommendations for the Department for Exiting the EU, TSC and the Public Accounts Committee. In addition, it recommends that the European Council’s request for further UK payments into the 2019 EU budget in the event of a no-deal Brexit be debated in HoC as soon as possible. The report can be accessed here.

PMO: Theresa May's meeting in Paris

A very short press release on Theresa May's meeting of 9 April 2019 with Emmanuel Macron can be accessed here.

The Law Applicable to Contractual Obligations and Non-Contractual Obligations (Amendment etc.) (EU Exit) Regulations 2019/834

This SI has been made and can be accessed here. It includes amendments in relation to Rome I and II and the Financial Services and Markets Act 2000 (Law Applicable to Contracts of Insurance) Regulations 2009.

PMO: Theresa May's meeting in Berlin

A very short press release on Theresa May's meeting of 9 April 2019 with Angela Merkel can be accessed here.

EC: Speech by Michel Barnier: Europe after Brexit

Text of a speech given at the College of Europe on 29 March 2019 can be accessed here.

Draft Financial Services (Miscellaneous) (Amendment) (EU Exit) (No. 2) Regulations 2019

Draft Regulations laid before Parliament under paragraph 1(3) of Schedule 7 to the European Union (Withdrawal) Act 2018. The draft Regulations can be found here.

EBA/EIOPA/ESMA: 2018 Annual Report

The ESAs have published their annual report, highlighting work undertaken in relation to consumer protection, fintech, Brexit and AML/CFT supervision. The report can be accessed here.

EC: Speech by Michel Barnier: Deal or no deal? The state of play of Brexit

Text of a speech given on 1 April 2019 can be accessed here.

ESMA: Impact on ESMA databases and IT systems of a no-deal Brexit

ESMA has published an update on the impact on its databases and IT systems of a no-deal Brexit scenario on 12 April 2019. The statement can be accessed here.

PMO: Statement by Theresa May

Text of Theresa May's statement of 6 April 2019 can be accessed here.

CMS RegZone publishes weekly updates (available via email, on-line and via Twitter) on Brexit developments for financial services firms. These provide analysis and commentary on significant developments during the week in question. A daily digest of Brexit news (without analysis or commentary) is also available by email here and online via the RZ news wizard here (both of these can be filtered using the Brexit topic). Links to publications are contained in each update; publications released before the updates commenced in April 2018 can be found in a bibliography here. CMS RegZone publication ‘Where we stand’ provides an overview of the current position in a single report; this is updated regularly to take account of the key developments from the weekly updates.