Finally, the transition period will end on 31 December 2020, and, at the time of writing, negotiations between the UK and EU give no indication that they will be anything other than standard "third countries" to each other from 2021 – albeit third countries with very similar legislation.

The main question for financial services businesses is simple – "What rules do I follow?". In this article, written for Compliance Monitor, Emma Radmore from Womble Bond Dickinson outlines what the regulators have been doing, and what firms should be looking at now.

The basic rule structure

At the highest level, Treasury, the Bank of England, PRA and FCA have been busy "onshoring" all relevant requirements that stem from, or are embedded in, EU requirements, to create a set of regulatory requirements that will apply after 11pm on 31 December 2020. Broadly, this means that:

  • Where an EU Regulation currently applies, there will be an equivalent UK measure, almost identical to the EU measure, but with necessary changes to reflect the fact that the UK is not part of the EU and therefore no provisions that treat other EU/EEA firms or countries differently to any other third country are relevant; and
  • Where there are references in UK legislation or rules to EU measures, or references to other EU/EEA firms or countries, these have been amended appropriately, either to refer to onshored legislation, or to refer to an EU measure which will be frozen in time.

Sounds simple? Below this basic structure bubble several nuanced layers.

The transition is over – or is it?

In some ways, the transition will continue for up to another couple of years. And it will do so in two ways.

The Temporary Transitional Power

Treasury has provided the UK financial regulators with a "Temporary Transitional Power" (TTP), which is intended to help ease the process to compliance with the new rules. On the whole, PRA and FCA are going to use the TTP to give firms the choice of when they comply with the new-look rulebook. In principle, until 31 March 2022 firms may comply either with the rules as they stood at the end of the transition period, or the amended rules.

There are, of course, exceptions. FCA has made a prudential transitional direction, and the Bank of England and PRA have made draft directions, under which firms must comply with their obligations as they were before the end of the transitional period, until 31 March 2022.

And, on the other hand, there are some areas where it is necessary for changes to be made at the end of the transition period, and the TTP cannot apply. These include:

  • Transaction reporting requirements under MiFID 2, reporting obligations under EMIR and the SFTR and certain requirements under MAR;
  • Contractual recognition of bail-in;
  • CASS requirements;
  • The market making exemption under the SSR, use of credit ratings for regulatory purposes and securitisation;
  • E-commerce EEA firms;
  • Mortgage lending on land in the EEA (these contracts can no longer be categorised for UK purposes as regulated mortgage contracts if the lending occurs after the end of the period, and may be regulated credit agreements instead); and
  • SCA and secure communication requirements (these have been onshored into UK-RTS and FCA expects firms to comply with the UK requirements from the end of transition).

FCA has said it will not use the TTP in relation to its duties, functions and powers – so it won't apply in relation to the credit rating agencies and trade and securitisation repositories it will be supervising. Nor does FCA intend to apply it to the changes the onshoring legislation has made to key perimeter instruments – particularly the Regulated Activities and Financial Promotion Orders.

The Temporary Permissions Regime

The Temporary Permissions Regime (TPR) has now been operational for some time, opening to increasing numbers of firms as the transition period window got longer. The purpose of the TPR is to allow firms that currently operate under a single passport right in or into the UK, or funds that are marketed under EU arrangements, to continue to operate in the way that they currently do for a limited period after the end of the transition period. Soon, we expect each relevant firm to be allocated a "landing slot" during which they must make their application for direct authorisation in the UK. FCA recently consulted on how it authorises third country firms, amid some lingering uncertainty about how firms that currently operate under a services passport will need to adapt. FCA's general stance is that it expects any firm it authorises to have a permanent place of business in the UK, and there is no indication that it plans to make any allowances for EEA firms. What does this mean for these firms? On the plus side, they can carry on their business as they have up to now, but they will need to make sure they comply with the onshored requirements which take effect from the end of the transition period. And they wait to receive notice of their landing slots. In the meantime, those without a UK presence may wish to consider whether they can carry on their future business without needing authorisation – for example, by using the "overseas persons" exclusion. Those that know they will require authorisation will need to start planning, so they can make their application within their designated window. If they miss their slot, they will be treated as being unauthorised from the time it ends.

Any EEA firm that does not wish to become authorised will also benefit from the Financial Services Contracts Regime, which is designed to help them exit the UK market in an orderly fashing

What do the rules look like?

Legislation

For the moment, the Government has been busy working to finalise many Statutory Instruments under the EU Withdrawal Act 2018. These will make the necessary changes to primary and secondary legislation to reflect references to pieces of EU legislation and mentions of EU/EEA firms as appropriate.

From a financial services law perspective, the UK is retaining EU law versions of key Regulations, including the Market Abuse Regulation, EMIR and the PRIIPS Regulation – making changes to ensure the measures can still operate. The overall effect will often be a shorter measure, which has stripped out many mentions of EU supervisory powers and duties, in the course of transferring mention of the relevant EU authorities to the relevant UK regulator.

An example of an area that has required extensive work is financial sanctions. Many regimes take effect directly from EU Regulations, but with UK legislation creating enforcement powers and additional or complementary requirements and guidance. UK Finance has recently published a document that sets out whether the changes made to make the content of the EU Regulation a UK measure have in fact changed the meaning of, or created additional obligations to, the original. It is a salutary warning that even if laws are supposed to be unchanged for practical purposes, there may in fact be some unintended consequences of their onshoring.

In due course, the UK will make new laws, and the Financial Services Bill currently going through Parliament will be part of this.

Regulatory requirements

Both PRA and FCA have published various instruments adapting their rulebooks for Brexit, and have written jointly and separately to firms urging them to make necessary preparations for a range of scenarios.

FCA in particular has now launched its post-Brexit handbook, which can already be time-travelled. It has placed highlighted banners in the handbook, noting where there are transitional directions, so that firms can choose whether to comply with the "old" or "new" version of the relevant rule.

The basic premise is that the rules work in a UK only context. A large part of this is the new "BTS" or Binding Technical Standard – effectively the UK version of things that were previously EU Regulations. The FCA handbook will contain a suite of these, including on the AIFMD, the BRRD and the CRD. Some will be standards made under EU law and incorporated into UK law, others will be measures that FCA has made using its powers under retained EU law.

Alongside this goes FCA's guidance on its approach to non-EU legislative materials – that is, guidance that predated the end of the transition period.

FCA's guide also explains how (as mentioned above) the EU Withdrawal Act has been used to incorporate existing EU law into UK law so that, for example, MiFIR now has a UK version. To see consolidated versions of retained EU legislation firms will still need to look to other providers though as this is not a facility FCA can offer.

What this appears to mean is that the FCA Handbook will be bigger than ever, but at least that means that more of the material will be in one place. It will take quite some getting used to though – especially navigating around the Technical Standards and Level 3 materials. In terms of the Level 3 materials, as these were only guidance, they have not formally been onshored, but they nonetheless remain relevant and will be useful. 

Enforcement

The UK regulators appreciate the huge amount of work some firms will need to do, and has said that, where the TTP does not apply, it will not take enforcement action against those who are not compliant by 31 December 2020, so long as the firm has taken reasonable steps to prepare to meet the new requirements by then. It will, however, consider taking action if it finds that serious and foreseeable harm is being, or has been, caused.

The Post-Brexit Rulebook – better or worse?

For most firms, and as is invariably the case with changes that bring with them a grace period, there is little point waiting. Some changes have to be complied with immediately, and if firms are having to assess for these, they may as well conduct a full analysis of all changes that will need to be made, even if not immediately required to make them. Even minor changes often take longer to implement than expected, and other things can often get in the way. Also, as highlighted above, sometimes what were supposed to be predominantly optical changes will actually have a more far-reaching effect.

The FCA Rulebook will also probably be quite hard to navigate for some time to come, as it tries to make it useable for firms both making use of the grace period and adapting sooner.

Will it stay that way?

The post-Brexit rulebook is really just a sticking plaster, though. The Government wants to move on, and is taking the opportunity of Brexit to review the structure and content of UK regulation. We mentioned above the Financial Services Bill, which will make changes to myriad aspects of law and regulation. The Government has also (as of 11 November), started to make its own equivalence instruments, confirming that the UK considers various laws to possess the appropriate degree of protection, and has published its policy on making these assessments. Alongside these immediate measures come future commitments in terms of free trade agreements, support for financial services and fintech and green finance initiatives.

Overall, hopefully, the post-Brexit legislative and regulatory environment will settle down, and in some respects may become easier to navigate than currently in some areas, where rules make reference to EU materials that then need to be tracked down and studied. But there will almost certainly be some teething problems along the way – and after these are overcome, the UK may be ready to make more fundamental changes to improve the operation of financial markets and regulation.