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This publication is available at https://www.gov.uk/government/publications/draft-financial-conglomerates-and-other-financial-groups-amendment-eu-exit-regulations-2018/draft-financial-conglomerates-and-other-financial-groups-amendment-eu-exit-regulations-2018-explanatory-information
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.
The SI will form 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 that will be made in the SI would not take effect on 29 March 2019 if, as expected, we enter an implementation period
The 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 andthe 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
3.1 What does the underlying EU regulation and UK law do?
A financial conglomerate is a group with activities in more than one financial sector. The EU’s Financial Conglomerates Directive (FICOD) was originally adopted by the EU in 2002 (Directive 2002/87/EC) and most recently amended in 2013 (Directive 2013/36/EU). The UK implemented FICOD through the Financial Conglomerates and Other Financial Groups Regulations 2004 (“FICOR”) and provisions in the FCA’s Handbook and PRA’s Rulebook. The central aim of these pieces of legislation was to address the lack of specific prudential treatment for financial conglomerates, contributing to greater financial stability and consumer protection.
Currently, the UK’s implementation of FICOD applies specifically to a financial conglomerate where at least one entity in the insurance sector and at least one entity in the banking or investment services sector. One of these entities must be located in the European Economic Area (EEA), while the other(s) may be located anywhere in the world (including the EEA). FICOD sets out specific requirements on solvency, specifically to prevent the same capital being used more than once as a buffer against risk in different entities in the same conglomerate. It also sets out requirements related to conglomerates’ management, risk management, and requirements for information sharing with relevant regulators.
3.2 Deficiencies the SI will remedy
The SI will identify and amend deficiencies within the EU text to ensure that the FICOR regulations will remain operative in a UK-only context post-exit. Specific changes that the SI will make include:
The definition of a financial conglomerate
As noted above, FICOD defines a financial conglomerate as a group with at least one entity in the insurance sector and at least one entity in the banking or investment services sector. One of these entities must be located within the EEA, while the other(s) may be located anywhere in the world (including the EEA).
The SI will amend the geographical restriction in the definition so that one entity must be located within the UK, rather than the EEA, while the other(s) may be located anywhere in the world. This is in line with how FICOD currently treats third countries, and means that the EEA will be treated as a third country by the UK perspective in the event of a no deal.
In practice this change will not affect financial conglomerates already operating in the UK. A financial conglomerate with at least one entity operating in the UK before exit met the FICOD requirement for having at least one entity operating in the EEA. Post-exit, the same financial conglomerate will continue to meet the new requirement in the SI. For example, if a bank located in the UK owned an insurance company in Spain, the group would be classified as a financial conglomerate – both currently and after exit. Therefore, firms will not experience a change in their status as a financial conglomerate as a result of onshoring. Furthermore, a financial conglomerate with an entity located in the EU27, and a second elsewhere (e.g. the USA), would still be subject to FICOD requirements under EU (rather than UK) law – the post-exit FICOD regime would of course not apply if there were no UK entities operating in the UK.
Definition of a competent authority
In the current text of the UK FICOR, a competent authority can mean any EEA regulator. The SI will amend “competent authority” to mean only UK regulators.
Transfer of functions
Both FICOD and FICOR detail various functions to be carried out by the European Supervisory Authorities (ESAs) – in particular, the European Banking Authority (EBA) and European Securities and Markets Authority (ESMA) – or the Joint Committee of the ESAs. These functions relate to obligations on firms to report certain information, as well as requirements placed on competent authorities to publish information. These functions will be transferred to the relevant UK authorities after exit.
An example of this is that the ESAs are currently required by FICOD to publish and maintain a list of financial conglomerates. The SI will transfer this function to the PRA and FCA.
FICOD/FICOR contain provisions that require EU competent authorities to share information. In the scenario in which the UK leaves the EU without a deal, it would not be appropriate for UK supervisors to be obliged to share information or cooperate with EU authorities unilaterally, without any guarantee of reciprocity. As such provisions in UK legislation relating to cooperation and information sharing have been removed. However, this will not preclude UK supervisors from sharing information with EU authorities, and the existing domestic framework for cooperation and information sharing with countries outside the UK already allows for cooperation on a discretionary basis. For example, Part Three of the FICOR Regulation enables coordination among EU competent authorities on the supervision of non-EU conglomerates. The SI will amend these provisions appropriately.
Competent authority discretions
FICOD contains certain provisions which give discretions for the FCA and PRA as competent authorities. These will be reflected in the post-exit regime.
Binding Technical Standards
Under the EU system of financial regulation, the Commission is responsible for developing legislation, with the exception of binding technical standards (BTS) which are developed and drafted by the EU Supervisory Authorities (ESAs). Across financial services regulation, the Treasury is transferring responsibility for all BTS to UK regulators. The basis on which this function is to be exercised is set out in the Financial Regulators’ Powers (Technical Standards) Statutory Instrument.
For FICOD, all of the relevant BTS mandates will be brought into UK law with responsibility for meeting those mandates transferred to the PRA and FCA. The PRA and FCA will have responsibility for correcting deficiencies in FICOD BTS so that they operate effectively from day one of exit, with the PRA and FCA then responsible for ensuring these BTS remain fit for purpose after exit.
3.3 Relevant rulebook and binding technical standard changes
The FCA and the PRA will be updating their Handbook/Rulebook and relevant binding technical standards to reflect the changes introduced through this SI, and to address any deficiencies due to the UK leaving the EU. Details of the FCA’s approach can be found here, and the PRA’s here. The FCA and the PRA have confirmed their intention to consult on these changes in the autumn.
The SI will affect financial conglomerates with at least one entity operating in the UK, which are already regulated under FICOD and FICOR. As already noted, the intention of the SI is not to make policy changes, other than to reflect the UK’s new position outside the EU. HM Treasury are engaging with industry bodies to ensure awareness of these changes.
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.
4. Next steps
HM Treasury plans to lay this instrument before Parliament before exit.
5. Further information
If you have queries regarding this instrument, email FSlegislationEUWA@hmtreasury.gov.uk.