© Crown copyright 2018
This publication is licensed under the terms of the Open Government Licence v3.0 except where otherwise stated. To view this licence, visit nationalarchives.gov.uk/doc/open-government-licence/version/3 or write to the Information Policy Team, The National Archives, Kew, London TW9 4DU, or email: firstname.lastname@example.org.
Where we have identified any third party copyright information you will need to obtain permission from the copyright holders concerned.
This publication is available at https://www.gov.uk/government/publications/draft-bank-recovery-and-resolution-and-miscellaneous-provisions-amendment-eu-exit-regulations-2018/the-bank-recovery-and-resolution-and-miscellaneous-provisions-amendment-eu-exit-regulations-2018-explanatory-information
Policy note on the draft Bank Recovery and Resolution and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018
The European Union (Withdrawal) Act 2018 (EUWA) repeals the European Communities Act 1972 on the day the UK leaves the EU and converts into UK domestic law the existing body of directly applicable EU law. The purpose of the EUWA is to provide a functioning statute book on the day we leave the EU.
The EUWA also gives Ministers powers to make Statutory Instruments (SIs) to prevent, remedy or mitigate any failure of EU law to operate effectively, or any other deficiency in retained EU law. We refer to these contingency preparations for financial services legislation as ‘onshoring’.
HM Treasury is using these powers to ensure that the UK continues to have a functioning financial services regulatory regime in any scenario.
This SI is part of the wider work the government is undertaking to prepare for the UK’s withdrawal from the EU. It is not intended to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition. The changes made in this SI would not take effect on 29 March 2019 if, as expected, we enter an implementation period.
The attached draft SI is intended to provide Parliament and stakeholders with further details on our approach to onshoring financial services legislation. The draft instrument is still in development. The drafting approach, and other technical aspects of the proposal, may change before the final instrument is laid before Parliament.
3. Policy background and purpose of the SI
What does the underlying EU regulation and UK law do?
The Banking Act 2009 established the UK’s Special Resolution Regime. This regime provides the Bank of England, the Prudential Regulation Authority (PRA) the Financial Conduct Authority (FCA) and HM Treasury with tools to protect financial stability by effectively resolving banks, building societies, investment firms, banking group companies and central counterparties that are failing, while protecting depositors, client assets, taxpayers and the wider economy.
The Bank Recovery and Resolution Directive (BRRD) established an EU wide framework for the recovery and resolution of credit institutions and investment firms that are failing or likely to fail, reflecting the Financial Stability Board’s Key Attributes of Effective Resolution Regimes for financial institutions (FSB Key Attributes).
The Banking Act 2009 was amended in 2014 as part of the UK implementation of the BRRD. The UK implementation of the BRRD was achieved through several statutory instruments which amended existing UK legislation in order to ensure the BRRD was implemented into UK law.
Deficiencies this SI remedies
HM Treasury’s approach to onshoring the BRRD is to ensure that the UK’s Special Resolution Regime is legally and practically workable on a standalone basis once the UK has left the EU. The policy aims of the BRRD will remain a core element of this regime, providing continuity and certainty as the UK leaves the EU, and conformity with the FSB Key Attributes.
However, some changes are required to reflect the UK’s new position outside the EU. These changes are to address places where UK legislation is deficient as a result of the UK’s withdrawal from the EU.
For the UK legislation that transposed the BRRD, HM Treasury will correct these deficiencies that arise from the UK’s withdrawal from the EU in the draft Bank Recovery and Resolution (Amendment) (EU Exit) Regulations 2018. Some of the key deficiencies that this instrument seeks to address are listed below.
Aligning UK legislation’s treatment of EEA states with that for third countries
The overall approach, in the unlikely scenario that the UK leaves the EU with no withdrawal agreement, is that the UK would treat EEA member states as it does other third countries. Broadly speaking for resolution policy, aligning the treatment for EEA states with that for ‘third countries’ will mean that EEA-led resolutions will be recognised in the UK, unless doing so is contrary to one or more statutory safeguards.
This means that once the UK leaves the EU, the same approach will apply to the recognition of EEA-led resolutions as currently applies to the recognition of third country resolutions. This is consistent with the UK’s G20 commitments and the FSB Key Attributes. In particular, the Key Attributes set out the need for transparent and expedited processes to give effect to foreign resolution measures.
Following EU withdrawal, the UK will retain (with amendments) its third country recognition framework and expand its scope to include EEA-led resolutions.
This framework applies to third country resolution actions that are broadly comparable in terms of their objectives and anticipated results to resolution actions taken under the UK regime. Refusal of such actions is only permitted where the Bank of England and HM Treasury are satisfied that one or more statutory grounds for refusal exist.
The conditions for refusing recognition are set out in section 89H(4) of the Banking Act 2009, which will be amended by the draft instrument to reflect the UK’s new position, such as by replacing references to the ‘EEA’ with ‘UK’. These conditions will be that recognition may only be refused if one or more of the following are met:
recognition would have an adverse effect on financial stability in the UK;
in order to achieve one or more of the special resolution objectives, it is necessary for UK authorities to take action in respect of a branch of the bank in question located in the UK
the third country resolution action treats creditors (particularly depositors) who are located or payable in the UK less favourably than creditors who are located or payable in the third country and have similar legal rights;
recognition would have material fiscal implications for the UK
recognition would be unlawful under section 6 of the Human Rights Act 1998 (public authority not to act contrary to Human Rights Convention)
The removal of the BRRD’s operational and procedural mechanisms
UK law currently requires the UK regulators to follow operational and procedural mechanisms set out in the BRRD to cooperate with other EEA authorities. For example, provisions in UK law require the UK’s participation in European resolution colleges and joint assessment and decision-making between UK and EU regulators. They also require the UK to consult and inform the European Banking Authority (EBA) and other EEA competent authorities in decision making.
When the UK withdraws from the EU, the BRRD will no longer apply to the UK. As a result, the requirement to have these operational mechanisms will fall away in relation to the UK. Therefore, the draft instrument removes them from UK law.
The removal of these BRRD operational mechanisms does not prevent UK regulators from co-operating with their EEA counterparts after exit. Following the UK’s withdrawal from the EU, both the Financial Services and Markets Act 2000 and the Banking Act 2009 will allow the UK authorities to continue to co-operate with EEA counterparts for resolution purposes. This co-operation is required by the FSB Key Attributes and, consistent with this, the UK authorities will continue to host Crisis Management Groups for the UK Global Systemically Important Banks (GSIBs) and to participate in the Crisis Management Groups for relevant GSIBs headquartered in the EU. This is consistent with the current approach taken with third-country head-quartered GSIBs. The UK authorities will continue to be permitted to share information for these purposes, subject to statutory restrictions on the disclosure of confidential information.
Cross references to the BRRD and other EU legislation
Throughout UK legislation there are numerous cross references to the BRRD. As the BRRD itself will not be retained in UK law after EU exit, the cross references will be copied out to retain the concepts that would have otherwise been lost.
This approach is to avoid changes to the underlying policy intention while addressing the deficiency arising because of EU exit. This is especially the case when referring to terms defined by the BRRD.
Cross references to the Capital Requirements Regulation (CRR), such as in relation to consolidated group supervision, will not be copied out but will refer instead to the onshored version of the CRR.
The approach towards the BRRD’s retained direct EU legislation
This instrument makes changes to the BRRD delegated regulations retained by the EU (Withdrawal) Act to ensure that they continue to be workable following the UK’s withdrawal.
A small number of the BRRD delegated regulations will be revoked where they do not apply to the UK.
4. Relevant Rulebook and Binding Technical Standard changes
Alongside this instrument the UK regulators will update their rulebooks and policies to take into account the UK’s new position and address any deficiencies arising from UK’s withdrawal from the EU. Additionally, under the terms of the Financial Regulators’ Powers (Technical Standards) (Amendment etc.) (EU Exit) Regulations 2018, HM Treasury has transferred responsibility for fixing any deficiencies arising from EU Exit that exist in certain detailed EU rules known as Binding Technical Standards (BTS) to the UK financial regulators.
The BRRD includes mandates for BTS relating to resolution and supervisory matters. BTS responsibility has been transferred to the Bank of England where the BTS relates to the powers of the resolution authority. Where the BTS relate to supervisory matters, responsibility has been transferred to the PRA and FCA as appropriate. The regulators will update industry and stakeholders on their approach towards these BTS in due course.
The stakeholders who will be interested in the instrument could include: UK banks, building societies, investment firms, banking group companies and central counterparties. Shareholders, depositors and debtholders in these institutions will also be interested. As well as any individual, firm or group that is a market participant or involved in the application of insolvency law in the financial sector.
This SI does not include provisions that may be necessary to ensure Gibraltarian financial services firms’ continued access to UK markets in line with the UK Government’s Statement in March 2018, and other provisions dealing with Gibraltar more generally. Where necessary, provisions covering Gibraltar will be included in future SIs.
6. Next steps
HM Treasury plans to lay this instrument before Parliament in the autumn.
HM Treasury intends to update the Special Resolution Regime Code of Practice after the SI has been laid in order to provide further clarity on the amendments to the UK’s Special Resolution Regime by this instrument.
7. Further information
If you have queries regarding this instrument, email FSlegislationEUWA@hmtreasury.gov.uk.