Gov gives post-Brexit financial regulation update

The UK has set out how it intends to approach a range of regulatory reforms which are being implemented at the international and European level.

Specifically, there were announcements today on how the government 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), alongside a review to improve the prudential rules for insurers.

Economic secretary to the Treasury and City Minister John Glen 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.”

In a written statement, the chancellor Rishi Sunak explained that 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.

Last year, the Treasury launched the Financial Services Future Regulatory Framework Review, with the next phase looking at how financial services policy and regulation are made in the UK, including the role of parliament, the Treasury and regulators.

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

“The government intends to implement immediate reforms in line with existing expectations of the industry and the approach of the EU and other international partners where relevant,” he stated. “Naturally there will be some defined areas where it is appropriate for the UK - as a large and complex financial services jurisdiction - to take an approach which better suits our market, while remaining consistent with international standards.”

The government previously announced its intention to use the Financial Services Bill to 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.

The Treasury has set out more detail on the UK's legislative approach to prudential regulation, introducing updated standards in a flexible and proportionate manner, as called for by industry and the House of Lords EU Affairs sub-committee.

Responsibility for firm requirements has therefore been delegated 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.

The FCA has published a discussion paper on a prudential regime for UK investment firms, with interim chief executive Christopher Woolard stating that the regulator has long advocated for a bespoke prudential regime for the sector.

“A new UK regime would represent a significant improvement in the prudential regulation of investment firms – for the first time, it would deliver a regime that has been designed with investment firms in mind.”

The FCA urged all solo-regulated investment firms that are currently authorised under MiFID, as well as collective portfolio management firms authorised by the PRA, to respond to the paper by 25 September.

To minimise uncertainty, the government and 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. Today’s statement also clarified 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 our transposition of CRDV will take place in July.

During the Transition Period, the government will implement EU legislation that requires transposition before the end of the year - including the transposition of the CRDV and the BRRDII by 28 December 2020.

BRRDII states that the deadline for institutions and entities to comply with end-state minimum fund requirements shall be 1 January 2024. Given this is after the end of the Transition Period, it is right that the UK exercises its discretion about whether to transpose those requirements.

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

The review will consider areas that have been the subject of long-standing discussion while the UK was a Member State, some of which may also form part of the EU’s intended review. These will include, but are not 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 the autumn.

“The government is committed to regulation that supports and enhances the functioning of UK capital markets,” stated Sunak. “It will therefore consider 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. Any future legislative changes will be developed through dialogue with the financial services industry, and sufficient time will be provided to prepare for the implementation of any new future regime, added the Treasury.

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 Treasury plans to set out further detail on upcoming legislation in due course, which will include:

• Amendments to the Benchmarks Regulation to ensure continued market access to third country benchmarks until end-2025 – with a policy statement due in July.
• 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.
• Legislation to improve the functioning of the Packaged Retail Investment and Insurance-Based Products (PRIIPs) regime in the UK and address potential risks of consumer harm in response to industry and regulator feedback – another policy statement is due next month.
• Legislation to complete the implementation of the European Market Infrastructure Regulation (REFIT) to improve trade repository data and ensure that smaller firms are able to access clearing on fair and reasonable terms.

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