Leaving the EU means the UK has taken back control of the rules governing our world-leading financial services sector. The UK has always championed and remains committed to the highest international standards of financial regulation. The financial services sector plays a crucial role in supporting the wider economy, creating jobs across the UK, supporting SMEs, contributing taxes, driving regional growth and investment, tackling climate change and embracing technology and innovation. The UK's financial services sector has also been at the forefront of our response to the economic impact of COVID-19, extending more than £35 bn of credit to provide fundamental support to businesses and offering crucial forbearance on mortgages and consumer credit products. Frontline staff have worked to keep bank and building society branches open throughout the pandemic, ensuring that people all across the UK could access the vital financial services they need.
The future success of the UK financial sector will be underpinned by a world-class environment for doing business. In turn, our future legislation will be guided by what is right for the UK, to support economic prosperity across the country, to ensure financial stability, market integrity and consumer protection, and to continue to ensure the UK remains a world leading financial centre. An enduring future relationship with the EU would help complement the UK’s leading global role in financial services. The Government continues to believe that comprehensive mutual findings of equivalence between the UK and the EU are in the best interests of both parties and we remain open and committed to continuing dialogue with the EU about their intentions in this respect.
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 WMS 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. Today I would like to update Parliament on how the UK intends to approach these in the immediate term.
Last year, HM Treasury launched the Financial Services Future Regulatory Framework Review, a long-term review looking at how the UK’s regulatory framework needs to adapt to the future and in particular to the UK’s position outside of the EU. The next phase of the Review 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. HM Treasury will consult on its approach to the next phase of the Review in the second half of this year.
In the Queen’s Speech on 19th December 2019, the Government also announced its intention to bring forward a Financial Services Bill in order to deliver a number of existing government commitments and to ensure that the UK maintains its world-leading regulatory standards and remains open to international markets. The Financial Services Bill will deliver our commitments to: 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.
In general, consistent with the UK’s position as a major international financial hub, 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. 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.
Today’s announcements provide clarity to all stakeholders about the UK’s legislative plans for the near future in relation to these forthcoming reforms, in relation to updating prudential requirements; maintaining sound capital markets; and, managing future risks.
Updating Prudential Requirements
The features that distinguish the UK as a leading global financial centre – openness, safety and transparency, innovative and resilient markets – are also in part anchored in international standards for financial regulation that the UK has had a significant hand in designing. Through organisations such as the G20, Financial Stability Board (FSB), and the Basel Committee on Banking Supervision, the UK has led the way in a number of key reform areas. Harmonised international standards are key to promoting the openness and resilience underpinning the UK’s sector.
The UK played a pivotal role in the design of EU financial services regulation. The Government remains committed to maintaining prudential soundness and other important regulatory outcomes such as consumer protection and proportionality. However, rules designed as a compromise for 28 countries cannot be expected in every respect to be the right approach for a large and complex international financial sector such as the UK. Now that the UK has left the EU, the EU is naturally already making decisions on amending its current rules without regard for the UK’s interests. We will therefore also tailor our approach to implementation to ensure that it better suits the UK market outside the EU.
The Government has 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. HM Treasury has today set out more detail on our legislative approach to prudential regulation in the document “Prudential standards in the Financial Services Bill: June update”. In particular, the Government intends to introduce updated prudential standards in a flexible and proportionate manner, as called for by industry and the House of Lords EU Affairs sub-committee. The Government intends to do this by delegating 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 June update further clarifies that 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 our transposition of CRDV will take place in July.
During the Transition Period, and under the terms of the Withdrawal Agreement, the Government will implement EU legislation that requires transposition before the end of 2020. This includes the transposition of the Fifth Capital Requirements Directive (CRDV), and the Bank Recovery and Resolution Directive II (BRRDII) by 28 December 2020. BRRDII makes amendments to the original 2014 Bank Recovery and Resolution Directive (BRRD) provisions, in order to update the EU’s resolution policy and Minimum Requirements for Own Funds and Eligible Liabilities (MREL) framework.
However, HM Treasury is considering how best to implement aspects of files that do not come into force until after the 31st December 2020. Given some of these changes do not come into force until the UK has left the Transition Period, it is right that the UK exercises its discretion when implementing these files.
For example, while we are committing to transposing most aspects of BRRDII, HM Treasury has considered how to ensure that it suits the UK market and we have today published a consultation document setting out more detail on this. In our transposition of BRRDII we are not intending to transpose the requirements in the Directive that do not need to be complied with by firms until after the end of the EU Exit Transition Period, in particular Article 1(17) which revises the framework for MREL requirements across the EU. MREL is the minimum amount of equity and debt that a firm must maintain to absorb losses and provide for recapitalisation, in the event of resolution. The purpose of MREL is to ensure that investors and shareholders, and not the taxpayer, absorb losses when a firm fails. The UK already has in place a MREL framework in line with international standards. BRRDII states that the deadline for institutions and entities to comply with end-state MREL 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 Autumn 2020.
Maintaining Sound Capital Markets
Under the terms of the Withdrawal Agreement, the Government will implement EU legislation that comes into force before the end of the Transition Period. The EU is in the process of implementing a range of provisions on capital markets, with some aspects applying before and after the end of the Transition Period. HM Treasury has considered how to take forward this legislation in the way that is to the benefit of the UK sector, while maintaining high regulatory standards
The Government is committed to regulation that supports and enhances the functioning of UK capital markets. 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
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. Given that systemically important NFC trading activity will be captured sufficiently through the other reporting obligations that are due to apply to financial counterparties, it is appropriate for the UK not to impose this further obligation on UK firms.
In addition to these measures set out above, HM Treasury will continue to maintain a global outlook on regulatory best practices, regardless of where those practices come from. This approach will continue to be guided by a commitment to maintaining high standards and achieving the same or better prudential outcomes as today, in the way that works best for the UK. HM 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. HM Treasury will publish a policy statement in July 2020;
- 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 (‘Persons Discharging Managerial Responsibilities’);
- Legislation to improve the functioning of the PRIIPs regime in the UK and address potential risks of consumer harm in response to industry and regulator feedback. HMT will publish a policy statement July 2020; and
- 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.
Managing upcoming risks
HM Treasury has today also published a written ministerial statement relating to LIBOR transition. The statement sets out detail on the Government’s approach to legislative steps that could help deal with ‘tough legacy’ contracts that cannot transition from LIBOR before end-2021. In particular the Government will use the Financial Services Bill to introduce amendments to the Benchmarks Regulation 2016/1011 as amended by the Benchmarks (Amendment) (EU Exit) Regulations 2018 (the ‘UK BMR’), to ensure that FCA powers are sufficient to manage an orderly transition from LIBOR.