On 22 September 2020, the Bank of England (BoE) and the Prudential Regulation Authority (PRA) jointly issued a Consultation Paper ‘UK withdrawal from the EU: Changes before the end of the transition period’ (the CP).

The CP provides:

  • An update on the BoE’s and PRA’s intended use of the temporary transitional power provided for in the Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019.
  • For a BoE and PRA consultation on proposals to fix deficiencies arising from the UK’s withdrawal from the EU and make consequential changes before the end of the transition period. The proposals are split into three parts:
  • Part 1 sets out BoE and PRA proposals in relation to consequential changes required to existing BoE and PRA EU Exit Instruments to update references to exit day and a small number of changes in light of adaptations to relevant EU legislation made by the European Economic Area (EEA) Agreement.
  • Part 2 sets out the PRA’s proposals in relation to the PRA Rulebook and binding technical standards (BTS) that will, or are expected to, be retained in UK law.
  • Part 3 sets out the BoE’s (as the financial market infrastructure (FMI) competent authority) proposals in relation to BTS that will be retained in UK law.

The transition period is due to last until 11pm on 31 December 2020, which is defined in UK law as ‘IP completion day’.

Notable points in the CP include:

  • It is the BoE’s and PRA’s view that a 15-month period for transitional relief remains an appropriate timeframe for firms and FMIs to adjust to onshoring changes after IP completion day. The new fixed end date of the transitional directions will be 31 March 2022. This will provide for a transitional period of 15 months from IP completion day.
  • As mentioned in previous BoE and PRA papers, for firms in the temporary permissions regime (TPR) and financial services contracts regime the transitional relief does not apply in most cases. For a limited number of provisions where transitional relief does apply, the BoE and PRA intend to continue the alignment of the maximum duration of TPR transitional relief with that of the overall BoE and PRA transitional relief. The BoE and PRA intend to provide 15 months of transitional relief for two aspects of third country branch requirements: (i) bank branch profit and loss reporting; and (ii) Solvency II reporting related to the branch minimum capital requirement and solvency capital requirement calculations.
  • The PRA intends to provide transitional relief to former passporting firms so that those firms will be allowed to benefit from transitional relief upon the Remuneration Part of the PRA Rulebook commencing to apply to them. Where the PRA imposes stricter requirements than required under the CRD IV, former passporting firms will not be required to comply with those stricter requirements until the beginning of the performance period following IP completion day. In place of those stricter PRA requirements the firm must comply with the corresponding CRD IV requirements. Former passporting firms will also not need to notify or seek new approvals from the PRA for the exclusion of material risk takers in accordance with the Material Risk Taker Regulation (Commission Delegated Regulation (EU) No 604/2014 of 4 March 2014 supplementing Directive 2013/36/EU of the European Parliament and of the Council with regard to regulatory technical standards with respect to qualitative and appropriate quantitative criteria to identify categories of staff whose professional activities have a material impact on an institution’s risk profile) in respect of the performance period in which the IP completion day falls. Former passporting firms may comply with certain proportionality thresholds either in sterling or in the euro thresholds specified by CRD V.
  • The PRA provides an update to the duration of transitional relief in BTS 2016/2251 on risk-mitigation techniques for over-the-counter derivative contracts.
  • The PRA expects a new Remuneration BTS to be in force before the end of the transition period. The European Banking Authority’s draft regulatory technical standards (RTS) identifying material risk takers identifies categories of staff whose professional activities have a material impact on the risk profile of firms. The draft RTS also defines certain terms used in relation to material risk taker identification in the CRD IV and in the PRA Rulebook following the transposition of CRD V. In the RTS there are three criteria based on minimum monetary thresholds denominated in euros (articles 6(3), 7(1)(a) and 7(4)). The PRA intends to set these thresholds in sterling after the end of the transition period.

The deadline for comments on the CP is 17 November 2020.