Treasury details post-Brexit financial services regulation

The Treasury has set out details of how the UK will regulate the financial services sector following its exit from the EU, with reforms planned to take effect following the end of the transition period at the close of the year

These include reforms to update UK prudential requirements, maintain the soundness of UK capital markets, and manage future risks.

In particular, the government is announcing how it intends to legislate for updated prudential rules to reflect international Basel standards and a new regime for investment firms, publishing a consultation on the transposition of the Bank Recovery and Resolution Directive II (BRRDII), and announcing a review to improve the prudential rules for insurers.

John Glen, the economic secretary to the Treasury and City minister, said: ‘Now we have left the EU the UK is making its own decisions about regulation.

‘There will be changes to some of the details, but our values as an open, global, responsible financial centre are staying the same. The best rules for Britain are those that maintain or enhance the world-leading standard of regulation that has underpinned our success to date.’

In a written statement to the House of Commons Rishi Sunak, Chancellor of the Exchequer, said: ‘There are now a range of important regulatory reforms in the process of being implemented at the international and European level that the UK needs to address before the end of the transition period on 31 December 2020.

‘The purpose of this statement is to set out how the UK intends to approach these, as well as a limited number of discrete areas for review to ensure relevant regulations remain appropriate for the UK financial sector.’

Sunak announced that the Treasury will begin a second phone of its long-term Financial Services Future Regulatory Framework Review, launched last year. This will look at how financial services policy and regulation are made in the UK, including the role of Parliament, the Treasury and the financial services regulators, and how stakeholders are involved in the process.

The Treasury will consult on its approach to the next phase of the review in the second half of this year.

The government also intends to bring forward a Financial Services Bill in order to deliver a number of existing government commitments. These include long-term market access between the UK and Gibraltar for financial services firms based on shared, high standards; and simplified process which allows overseas investment funds to be sold in the UK.

The bill will also legislate to enable the implementation of a new prudential regime for investment firms and to update the regulation of credit institutions, including the implementation of the international Basel III standards.

Sunak said the government intends to delegate responsibility for firm requirements to the relevant regulator – the Prudential Regulation Authority (PRA) or the Financial Conduct Authority (FCA) – subject to an enhanced accountability framework to ensure that the regulators have regard to competitiveness and equivalence when making rules for these regimes. Both the PRA and the FCA will set out further details on the substance of the proposed regimes in due course.

To minimise uncertainty, the government and the regulators propose to introduce the new Investment Firms Prudential Regime (IFPR) and updated rules for credit institutions in line with the intended outcomes of the EU’s Investment Firms Regulation and Directive, and the second Capital Requirements Regulation respectively.

For the IFPR, the Treasury said the government and the PRA do not intend to require PRA-designated investment firms to re-authorise as credit institutions, unlike the EU regime. It also clarifies that the government does not intend to require FCA-regulated investment firms to comply with the requirements of the Fifth Capital Requirements Directive (CRDV) in the period until the new IFPR applies. A consultation on the transposition of CRDV will take place in July.

Sunak said that while the UK is committed to transposing most aspects of BRRDII, the Treasury has published a consultation document setting out some of the proposed changes to tailor requirements to the UK market.

The government also plans to bring forward a review of certain features of Solvency II to ensure that it is tailored to take account of the structural features of the UK insurance sector. The areas under consideration include 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.

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.

Additionally, 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.

The financial services bill will include measures to amend and strengthen the existing regulatory framework for critical benchmarks such as LIBOR, in light of the phasing out of LIBOR and the introduction of an updated regime.

Useful links

Written ministerial statement on financial services

Prudential standards in the Financial Services Bill: June Update

Consultation on the transposition of the Bank Recovery and Resolution Directive II

FCA discussion paper on Prudential requirements for MiFID investment firms (deadline is 25 September)

FCA statement on planned amendments to the Benchmarks Regulation 

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