Thirty Eighth Report Contents

Thirty Eighth Report

Instruments drawn to the special attention of the House

Draft Financial Regulators’ Powers (Technical Standards) (Amendment etc.) (EU Exit) Regulations 2018

Date laid: 16 July 2018

Parliamentary procedure: affirmative

Summary: HM Treasury (HMT) has acknowledged that the UK’s exit from the EU will require a significant volume of changes to the rules overseen by the UK’s financial services regulators; these draft Regulations are intended to expedite the making of such changes, by proposing that the regulators perform the task of making corrections to deficiencies in existing Binding Technical Standards so that these rules operate effectively in the UK at exit from the EU. The Regulations have been laid for what HMT describes as the unlikely eventuality of a “no deal” scenario, to ensure that the UK continues to have a functioning financial services regulatory regime in all outcomes.

We draw these Regulations to the special attention of the House on the ground that they give rise to issues of public policy likely to be of interest to the House.

Background—approach to financial services legislation under the EU (Withdrawal) Act 2018

1.On 27 June of this year, HM Treasury (HMT) published a document detailing its approach to financial services legislation under the European Union (Withdrawal) Act 2018 (“the 2018 Act”).1 That document said that, while the Government were confident that the implementation period, agreed between the UK and the EU earlier in 2018, would be in place between 29 March 2019 and 31 December 2020, the Government would ensure that “a workable legal regime is in operation whatever the outcome of negotiations.” Among other things, it stated that HMT planned to delegate powers to the UK’s financial services regulators to address deficiencies in the regulators’ rulebooks arising as a result of the UK’s exit from the EU, and in the EU Binding Technical Standards (BTS) that would become part of UK law. These draft Regulations, the first laid by HMT under the 2018 Act, propose the delegation of those powers.

2.In the Explanatory Memorandum (EM) to the Regulations, HMT again stresses that the Government are clear that a “no deal” scenario is in neither the UK’s nor the EU’s interest, and do not anticipate that it will arise. However, “to prepare for this unlikely eventuality”, HMT intends to use powers under the 2018 Act to ensure that the UK continues to have a functioning financial services regulatory regime in all scenarios.

Binding Technical Standards and UK financial services regulators

3.HMT explains that BTS set out very specific requirements and standards in order to ensure that financial services institutions are able to comply with the EU’s financial regulation. While European Supervisory Authorities are currently responsible for drafting BTS, an appropriate UK body will need to take on responsibility for these standards after the UK’s exit from the EU.

4.The UK’s financial services regulators are the Bank of England, the Prudential Regulation Authority (PRA), the Financial Conduct Authority (FCA) and the Payment Systems Regulator (PSR). HMT says that these UK regulators have played an important role in the EU to develop these standards and have the necessary expertise and resource to maintain BTS after the UK’s exit; and that this allocation of responsibility would be consistent with the general rule-making responsibilities already delegated to the FCA and PRA under the Financial Services and Markets Act 2000.

5.HMT states that, as it proposes to transfer ongoing responsibility for BTS to the UK regulators, it also makes sense that the regulators perform the task of making corrections to deficiencies in existing BTS so that these rules operate effectively in the UK at exit. These draft Regulations therefore propose that the power to correct deficiencies in BTS arising from EU withdrawal should be delegated to the UK’s financial regulators, as well as the power to correct deficiencies in their existing rules that arise as a result of the UK’s withdrawal from the EU. HMT says that, while the PRA and FCA already have powers to amend these rules under existing legislation, the procedures to use these powers were not designed to deliver the volume of rule amendments that will be needed as a result of leaving the EU and these procedures may not always be appropriate for the task. HMT would be required to approve all instruments which the regulators used to correct deficiencies in BTS or regulator rules, and would ensure that all such corrections were within the powers sub-delegated to the regulators, and were consistent with corrections to other parts of retained EU law which Parliament has approved.

Format of Explanatory Memorandum—Ministers’ statements

6.The EM to these Regulations follows the revised format that has been adopted by the Government in order to address more specifically issues that bear on secondary legislation related to the UK’s exit from the EU. This format incorporates an Annex on statements under the 2018 Act; and Part 2 of the Annex includes a statement from the Economic Secretary to the Treasury that the Regulations “do no more than is appropriate. Nothing has been done to alter the role that BTS or regulators’ rules perform in the regulation of financial services. They will continue to apply to UK firms as they do now, save for any correction of deficiencies which is necessary to ensure these rules continue to operate effectively after exit.”

Conclusions

7.As noted above, HMT has acknowledged that the UK’s exit from the EU will require a significant volume of changes to the rules overseen by the UK’s financial services regulators; these draft Regulations are intended to expedite the making of such changes–an approach which has been described as addressing the risk of “UK legislative sclerosis”.2 The Regulations have been laid for what HMT describes as the unlikely eventuality of a “no deal” scenario, to ensure that the UK continues to have a functioning financial services regulatory regime in all outcomes.


1 HM Treasury HM Treasury’s approach to financial services legislation under the European Union (Withdrawal) Act (June 2018), 27 June 2018: https://www.gov.uk/government/publications/financial-services-legislation-under-the-eu-withdrawal-act [accessed 17 July 2018].

2 ‘Onshoring EU financial services legislation under the European Union (Withdrawal) Act 2018’, Clifford Chance (6 July 2018): https://www.cliffordchance.com/microsites/brexit-hub/briefings/onshoring-EU-financial-services-legislation-under-the-European-Union-Withdrawal-Act-2018.html [accessed 17 July 2018].




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