HM Treasury has published a letter from Stephen Barclay, Economic Secretary to the Treasury, to Nicky Morgan, Treasury Committee Chair, concerning the onshoring of EU financial services legislation.
The letter follows a meeting on 11 December 2017, at which Mr Barclay and Ms Morgan discussed how HM Treasury intends to use the European Union (Withdrawal) Bill 2017-19 (the Bill) to domesticate the body of EU financial services legislation.
In the letter, Mr Barclay summarised the proposed approach as follows:
- in financial services, a significant amount of the regulatory framework is within EU law. HM Treasury intends to domesticate this framework in a way that aligns with the UK’s existing regulatory framework, as approved by Parliament in successive pieces of legislation. The cornerstone of the framework is the Financial Services and Markets Act 2000 (FSMA 2000), which delegates responsibility to the UK financial services regulators to make the detailed rules that apply to firms within the framework set by Parliament. HM Treasury proposes to broadly follow this model as it onshores EU financial services legislation;
- under the Bill, level 1 and level 2 EU legislation, with the exception of level 2 binding technical standards (BTS) and certain highly technical detailed elements of a particular delegated act (which is not named in the letter) will become the responsibility of UK Ministers and Parliament on Brexit. This EU legislation sets the policy direction for financial services, so it is right that, once onshored, responsibility for this legislation should rest with Ministers and Parliament. HM Treasury will lay fixes to this legislation in secondary legislation (the majority being affirmative statutory instruments) under the Bill. This will ensure that Parliament has oversight of all changes that are needed to this legislation;
- for BTS, HM Treasury proposes to transfer responsibility from the European Supervisory Authorities (ESAs) to the PRA, the FCA and the Bank of England. The BTS do not set policy direction, but fill out the technical detail of how the requirements set at level 1 are to be met. The UK regulators have the necessary expertise and resources to maintain them. This allocation is consistent with the FSMA framework under which the regulators make detailed technical rules;
- the ESAs have responsibility for developing and drafting BTS, and it is the European Commission’s role to adopt them so that they are brought into law. HM Treasury proposes to combine these functions in the UK so that they fit within the existing FSMA framework. It proposes that the UK regulators will have the same responsibilities for developing and drafting any necessary BTS changes, and “making” those changes so that they become binding in law;
- each mandate for developing BTS, including the limits imposed by EU law on the exercise of these mandates, will be onshored. The Parliament will be asked to approve, through the affirmative procedure, each specific BTS mandate that will be transferred to the UK regulators. As a result, the UK regulators will only be able to make BTS for the specific purposes approved by Parliament;
- as the proposal is to transfer responsibility for BTS to the UK regulators, the UK regulators will perform the task of making any appropriate corrections to the BTS so that they work effectively in the UK from Brexit day. As a result, HM Treasury proposes to sub-delegate to the regulators, by way of affirmative secondary legislation, the ability to make fixes to BTS to ensure that they are consistent with the legislative changes that Parliament oversees;
- HM Treasury is working closely with the UK regulators to ensure that the entire body of onshored financial services legislation is ready for day one of Brexit. This includes finding a workable approach to engaging with the industry and other stakeholders; and
- HM Treasury plans to use affirmative statutory instruments to transfer any other relevant functions that are currently performed by the ESAs to the UK regulators. In summary, each specific function that HM Treasury proposes to transfer to the UK regulators will need Parliament’s approval using the affirmative statutory instruments procedure.
Mr Barclay plans to update Ms Morgan on HM Treasury’s timetable for the legislation in 2018.
View HM Treasury sets out proposed approach to onshoring EU financial services legislation, 20 December 2017