FCA’s state of play speech on Brexit preparations for financial services

02.10.19

In a speech delivered on 16 September 2019 Andrew Bailey, Chief Executive of the UK’s Financial Conduct Authority (FCA), gave an update on the FCA’s Brexit preparations.  

Mr Bailey outlined three broad areas of progress and preparedness for a no-deal Brexit:   


•    On-shoring of legislation is on track, 
•    cooperation agreements have been signed or updated, and 
•    the FCA is preparing for the transfer of certain ESMA functions, including the regulation of credit rating agencies and trade repositories, and MiFID2 responsibilities.


While this is good news, seven remaining issues were identified by the FCA as requiring further action:


•    Share Trading Obligations (‘STOs’): the problem of the overlap of the UK’s and the European Securities and Markets Authority’s (ESMA) STOs remains unresolved and will damage market liquidity of EU shares traded in the UK.  The solution would be an equivalence agreement but to date, the EU and the UK have not yet agreed on one. The FCA could use its transitional powers, which enable it to delay or phase changes to regulatory requirements made under the EU Withdrawal Act 2018, to mitigate disruption resulting from the overlap but this would not remove the difficulty for EU investors accessing liquidity on EU shares listed in London. The FCA is prepared to enter into dialogue with its European counterparts before finalising its approach.


•    Derivatives Trading Obligations (‘DTOs’):  as the EU’s DTO regime requires EU firms to trade certain classes of OTC derivatives on EU or equivalent third country trading venues (on day one after Brexit the UK’s rules will be identical), and in the absence of an equivalence agreement, EU firms will not be able to use UK trading venues to trade those derivatives, and vice versa.  As all OTC derivatives subject to the EU DTO have their main liquidity pool on a UK venue, EU firms may lose access to UK liquidity pools and liquidity would be fragmented. This has the potential to damage both the UK and the EU market.  In the absence of equivalence, the FCA will work with EU regulators to try and avoid firms being caught by both DTOs.  


•    Clearing: unless the EU grant permanent recognition to UK CCPs - the best solution in the FCA’s opinion - contracts that EU Members clear with UK CCPs will need to be closed out or transferred by the time the temporary recognition expires in March 2020.


•    Uncleared Derivatives: as the EU has not mirrored the UK’s measures (through the Temporary Permissions Regime and Financial Services Contracts Regime) to allow firms to service existing uncleared derivatives between UK and EU counterparties, many EU Member States have implemented individual measures to prevent disruption to contract continuity.  Uncertainty remains, however, around the scope of existing and proposed legislation in certain jurisdictions.


•    Data exchange: while the UK has legislated to allow the free flow of personal data from the UK to the EU in the event of a no-deal Brexit, EU authorities have not taken reciprocal action.  This could limit consumers and businesses accessing financial services from, and continuing contracts with UK financial service providers.  The FCA also believes that data sharing between the UK and EU countries, essential to the fight against cross-border market abuse, must continue to enable the FCA and its European counterparts to deliver on their respective public interest objectives.


•    Contract Repapering Progress: while several EU Member States have legislated to allow UK firms to continue temporarily to provide certain services in their jurisdiction in a no-deal scenario, these provisions are not EU-wide and the scope of activities covered, and duration, vary.  Uncertainty therefore exists around how these provisions will be applied.


•    Retail Financial Services:   the FCA expects firms to do what they can to act consistently with local legal and regulatory requirements whilst being driven by the right consumer outcomes.

In terms of next steps the FCA will continue to engage closely with their EU counterparts to deal with issues arising.  In the FCA’s view the UK and the EU ought to be able to find each other equivalent on day one after Brexit through having the same legislation and well established supervisory approaches.  While the FCA has made considerable progress i not underestimate the work ahead.

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