On 9 November 2020, the Chancellor of the Exchequer, Rishi Sunak MP, delivered a statement to the House of Commons. In his statement the Chancellor provided an update to the House on the Government’s plans for financial services.
Key points in the statement include:
- As the UK leaves the EU it has an opportunity to set out a new vision for the financial services sector. This vision is based not on a race to the bottom, but for a financial services industry that is open, innovative and leads the world in the use of green finance.
- It is in both the UK and EU’s interests to reach a comprehensive set of mutual decisions on equivalence. However, there are areas where the EU is simply not prepared to even assess the UK.
- To provide certainty and stability to the financial services industry, the Government is publishing a set of equivalence decisions for the EU and EEA Member States (see below). The Government is also publishing a detailed framework for its approach to equivalence more generally (also see below). The Government’s approach to equivalence will be simple: it will use equivalence when it is in the UK’s economic interests to do so taking a technical, outcomes-based approach that priorities stability, openness and transparency.
- Another part of the new chapter for financial services will be the use of technology to deliver better outcomes for consumers and businesses. In terms of payments technologies, the first stage of the Payments Landscape Review has been concluded and the Government will publish new plans to support the sector. The Government also looks forward to receiving the report following the Independent Fintech Strategic Review. The Government will also shortly publish a consultation to ensure that stablecoins meet the same high standards expected of other payment methods.
- The Government will be putting the full weight of private sector innovation, expertise and capital behind efforts to tackle climate change.
- The Government is announcing the UK’s intention to mandate climate disclosures by large companies and financial institutions across the UK economy, by 2025. This goes further than the recommendations by the Taskforce on Climate-related Financial Disclosures.
HM Treasury has published a document providing detail on the equivalence decisions the UK is making for the EEA States. The equivalence decisions will be laid before Parliament on 10 November 2020. The Government has confirmed that it is not ruling out further equivalence decisions for the EEA States in the future as it continues to believe that comprehensive mutual findings of equivalence between the UK and the EEA States are in the best interests of both parties, however, the UK awaits clarity from the EU about their intentions.
The equivalence decisions are:
- The European Market Infrastructure Regulation (Article 13) Equivalence Directions 2020 will grant equivalence to the EEA States for the intragroup exemption in Article 13 of the European Market Infrastructure Regulation (EMIR) which will form part of UK law at the end of the Transition Period. HM Treasury is granting a partial Article 13 decision in relation to the intragroup exemption in regard to activities subject to the clearing obligation (Article 4) and over-the-counter (OTC) derivative margin requirements (Article 11). This decision paves the way for UK firms to seek or apply an exemption from the requirement to clear through a central counterparty (CCP) or meet margin requirements for transactions with an EEA State entity in the same group. Granting this decision means these exposures can qualify as intragroup exposures in the credit valuation adjustment (CVA) calculation, ensuring that UK firms will in many cases not have to capitalise CVA on OTC exposures to EEA State affiliates.
- The European Market Infrastructure Regulation (Article 2A) Equivalence Directions 2020 will grant equivalence to the EEA States for the purposes of Article 2A of EMIR. This will enable UK firms to continue to treat derivatives traded on EEA regulated markets as exchange-traded derivatives rather than OTC derivatives. Facilitating this continuity for firms minimises the disruption they will experience following the end of the Transition Period.
- The Capital Requirements Regulation Equivalence Directions 2020 will grant equivalence to the EEA for Articles 107 (3),114(7), 115(4), 116(5), 132(3), 142(2) and 391 of the Capital Requirements Regulation which will form part of UK law at the end of the Transition Period. This direction covers 7 equivalence decisions. For UK firms, these equivalence decisions will ensure they will not be subject to increased capital requirements as a result of their EEA State exposures.
- The Solvency 2 Regulation Equivalence Directions 2020 will determine that for the purposes of Articles 378, 379 and 380 of the Solvency II Regulation (Solvency II), which will form part of UK law at the end of the Transition Period, the EEA States are equivalent. This direction covers all 3 equivalence decisions covering both reinsurance and group capital treatment. A full set of Solvency II equivalence decisions for the EEA States is beneficial for the UK by providing certainty and continuity.
- The Central Securities Depositories Regulation Equivalence Directions 2020 will determine that central securities depositories (CSDs) in each EEA State are equivalent to Article 25 of the Central Securities Depositories Regulation (CSDR) which will form part of UK law at the end of the Transition Period. With equivalence granted, the Bank of England can then assess CSDs in the EEA for recognition (subject to establishing co-operation arrangements with the relevant EU authorities), allowing those CSDs, once recognised, to continue to service UK securities and to exit the transitional regime contained in onshored Article 69 CSDR and Part 5 of The Central Securities Depositories (Amendment) (EU Exit) Regulations 2018.
- The Benchmarks Regulation Equivalence Directions 2020 will determine that benchmark administrators in each EEA State comply with legal requirements which are equivalent to the Benchmarks Regulation which will apply in UK law at the end of the Transition Period and are appropriately supervised in the relevant EEA Member State. This equivalence decision acts as a mechanism to enable such administrators to be added to the FCA’s benchmarks register, and to enable them to provide benchmarks to supervised entities in the UK. The Government intends to extend the transitional period for all overseas benchmarks from end-2022 to end-2025 in the Financial Services Bill. During the transitional period for third country benchmarks, UK supervised entities are permitted to use all third country benchmarks.
- The Credit Rating Agencies Regulation Equivalence Directions 2020 will determine that, for the purposes of Article 5 of the Credit Rating Agencies Regulation which will form part of UK law at the end of the Transition Period, the EEA States are equivalent. This means non-systemic credit rating agencies (CRAs) authorised or registered in the EEA States will be able to apply to be certified in the UK, subject to certain regulatory requirements. Endorsement also allows for the cross-border use of ratings between the UK and the EU. This allows UK-registered CRAs to endorse credit ratings issued from affiliated EU CRAs which allows them to be used for regulatory purposes by UK firms. One condition for endorsement is that the EU regulatory and supervisory framework is deemed to be ‘as stringent as’ the UK framework. The FCA concluded a positive endorsement assessment in March 2019.
- The Short Selling Regulation Equivalence Directions 2020 will determine that EEA States markets are equivalent for the purposes of Article 17 of the Short Selling Regulation (SSR) which will form part of UK law at the end of the Transition Period. This means that EEA market makers will be eligible to make use of the exemption in Article 17 of the SSR (which disapplies certain short selling restrictions and reporting requirements) subject to complying with certain regulatory requirements.
- The Central Counterparties (Equivalence) Regulations 2020 will grant equivalence to CCPs established in EEA States. Therefore, subject to entry into an appropriate cooperation arrangement between the Bank of England and the relevant national competent authority in that EEA state, and a CCP-specific recognition determination by the Bank of England, after the end of the transition period UK firms will be able to continue using EEA CCPs. This equivalence decision does not exclude EEA CCPs from the Temporary Recognition Regime (TRR). Until recognition decisions are made, EEA CCPs who meet the relevant eligibility criteria will remain in the TRR, which is due to last until December 2023 and may be extended by HM Treasury.
- The Department for Business, Energy and Industrial Strategy will be laying The Statutory Auditors and Third Country Auditors (Amendment) (EU Exit) (No. 2) Regulations 2020 to grant audit equivalence to the EEA States and approve as adequate their audit competent authorities.
The decisions are in addition to the directions already made by HM Treasury in 2019 which granted equivalence and exemption decisions to the EEA States. In 2019 HM Treasury made the Prospectus Regulation and Transparency Directive Directions 2019 which granted equivalence to the EEA States in respect of Article 29(3) of the Prospectus Regulation and the relevant UK law implementing Article 23 of the Transparency Directive.
In addition, HM Treasury also made directions which granted exemptions in respect of the central banks of the EEA States as follows:
- The Market Abuse Exemption Directions 2019 and the Market Abuse Exemption (No.2) Directions 2019.
- The Markets in Financial Instruments Exemption Directions 2019.
- The OTC Derivatives, Central Counterparties and Trade Repositories Exemption Directions 2019 and The OTC Derivatives, Central Counterparties and Trade Repositories Exemption (No.2) Directions 2019.
- The Transparency of Securities Financing Transactions and of Reuse Exemption Directions 2019 and The Transparency of Securities Financing Transactions and of Reuse Exemption (No.2) Directions 2019.
HM Treasury has also published a guidance document outlining the principles and processes which will govern the UK’s equivalence framework from the end of the Transition Period. HM Treasury has also published an excel spreadsheet containing a table of UK equivalence decisions.
The guidance document outlines how HM Treasury will operate its model under the equivalence framework for financial services, in such a way that supports the UK’s commitment to upholding open and global markets underpinned by the highest standards of regulation and supervisory oversight. This framework at its core will operate an outcomes-based model for determining, monitoring and reviewing equivalence, which will take into account the risks to the UK arising from the relevant overseas jurisdiction’s financial system and relevant equivalence provisions and promotes the implementation of international standards. This framework also recognises that equivalence should reconcile the need for financial stability and consumer protection and be an evidence-based and cooperative process. The framework also provides for a structured process for the establishment, monitoring, review and (if necessary) withdrawal of equivalence to provide stability and consumer protection.
Among other things the guidance document states that the Government has shown its desire to promote stability for UK industry and overseas firms by incorporating nearly all of the existing EU equivalence determinations into UK law. This will allow firms from non-EU jurisdictions whose business with the UK is underpinned by these decisions to continue this business on the same basis as during the UK’s membership of the EU. The guidance document adds that these determinations will continue to have effect in UK law until and unless they are revoked, which would only take place under the review and withdrawal process. The guidance document notes that there is one exception to this approach. The Government did not onshore equivalence decisions for CCPs that the EU made under Article 25 of EMIR. These decisions will no longer apply at the end of the transition period. HM Treasury is undertaking new assessments for overseas jurisdictions. It is anticipated that new decisions will be made by HM Treasury and decisions to recognise individual CCPs within a jurisdiction deemed to be equivalent will be made by the Bank of England. All overseas CCPs for which a recognition decision has not been made by the end of the Transition Period will be able to continue providing services in the UK and to firms by using the UK’s ‘Temporary Recognition Regime’ for non-UK CCPs.