On 16 September, the FCA has published a speech given by its chief executive, Andrew Bailey. The speech was delivered at Bloomberg in London and is entitled Preparing for Brexit in financial services: the state of play.
In his speech, Mr Bailey presents a summary of the FCA’s current work in preparing the financial services industry for Brexit. Mr Bailey explains that the FCA continues to plan for all potential outcomes including the possibility of a no deal exit. He also states that firms in the UK have stepped up their preparations, the authorities in the UK have made good progress, and in the EU authorities have mitigated risks of material disruption to cleared derivatives markets by announcing temporary recognition and conditional equivalence decisions for the UK’s central counterparties (CCPs) and the regulatory framework for them. Most EU states with material uncleared derivatives activity have also implemented measures which seek to address cross border contract continuity although some uncertainty remains about the scope of current or proposed legislation in some jurisdictions.
The remainder of Mr Bailey’s speech focuses on the following issues that in one form or another require further action, either in the UK or the EU:
- the Share Trading Obligation (STO). Mr Bailey argues that to deal with the overlapping of EU and UK STO requirements in a no-deal Brexit, there should be an equivalence agreement between the UK and the EU. Despite the onshored UK framework being the most equivalent in the world to the EU’s regime, the EU has so far said that it will not do that;
- the Derivatives Trading Obligation (DTO). In the absence of equivalence, the FCA will work with EU regulators to try and avoid firms being caught by both the EU and the UK DTOs. The FCA believes that the right outcome would be for regulators to ensure that where there is a conflict of law, they are clear which rule firms should follow. However, this will only work if EU regulators were able to do the same. Mr Bailey warns that it “would be a suboptimal outcome if the only place firms can execute in a way that complies with their regulatory obligations is outside Europe”;
- Mr Bailey welcomes the steps already taken by the UK and EU authorities to mitigate the risks around continued access to UK and EU clearing services. However, temporary recognition for UK CCPs would expire in March 2020. Mr Bailey warns that without greater clarity on the regulatory status of UK CCPs after this date, the contracts that EU members clear with UK CCPs will need to be closed out or transferred by then. This process would need to begin by the end of this year, and would impose significant costs on EU firms as well as potentially straining market capacity. Further action may therefore be necessary to prevent this. Mr Bailey argues that ultimately, the best solution is for the EU to grant permanent recognition to UK CCPs;
- uncleared derivatives. Mr Bailey states that the UK, through the Temporary Permissions Regime and Financial Services Contracts Regime, has taken appropriate measures to allow firms to service existing uncleared derivatives between UK and EU counterparties. However, the EU has not taken reciprocal action. Whilst individual Member States have implemented measures which seek to address the risks some uncertainty remains about the scope of current or proposed legislation, in some jurisdictions;
- data exchange. Mr Bailey explains that the UK Government has legislated to allow the free flow of personal data from the UK to the EU in a no-deal scenario, but without action by EU authorities EU rules would limit the flow of personal data from the EU to the UK. This may restrict EU households and businesses accessing financial services from, and continuing contracts with, UK financial service providers; and
- progress on contract repapering. Mr Bailey states that progress has been gradual. Several EU Member States have legislated to allow UK firms to continue temporarily to provide certain services in their jurisdiction following a no-deal Brexit. However, access provisions are not EU-wide, and they vary in respect of which activities they cover and what their durations are. There is therefore uncertainly around how some of these provisions will be applied.