UK financial services regulators’ temporary transitional powers – the clock starts to run

With the end of the Brexit transition period approaching, the UK financial services regulators – the Bank of England (BoE), Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) – have published their updated approaches to the temporary transitional power (TTP). They have provided information as to how their rules will apply at the end of the transition period, how the TTP will interact with the transitional regimes and guidance to assist firms. This blog post looks more closely at the regulators’ updated approaches to the TTP.

The Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019 created the TTP to provide UK regulators with flexibility as to how and when changes to their rules would apply following the end of the transition period. The application of the TTP is limited to facilitating firms and financial market infrastructures (FMIs) in adjusting to the UK’s post-transition regulatory regime; where a firm’s or FMI’s obligations are unaltered by legislation made under the EU (Withdrawal) Act 2018, the TTP cannot be used to alter or modify these.

The regulators intend to apply the TTP on a broad basis from the end of the transition period until 31 March 2022. After that date full compliance with onshored regulatory obligations will be required.

Application of the TTP results in regulated entities being able to continue to comply with their existing requirements for a limited time (‘standstill’ approach) thus enabling firms time to transition to the new UK onshored rules. For example, firms and FMIs will be able to continue to give preferential treatment for regulatory capital purposes for EU27 exposures and assets.

However, whilst at first appearing a welcome respite for UK firms still grappling with effects of the COVID-19 pandemic, there are several important exceptions to the TTP where the regulators have said that to grant relief would be inconsistent with their statutory objectives. For example, the FCA will not include transaction reporting requirements under the revised Markets in Financial Instruments Directive and associated Regulation (MiFID and MiFIR) or reporting obligation requirements under the European Market Infrastructure Regulation (EMIR) and Securities Financing Transactions Regulation within the TTP relief. 

So as not to undermine resolvability of firms, the regulators have all excluded granting transitional relief in respect of liabilities that are intended to count towards a firm’s minimum requirement for own funds and eligible liabilities; therefore, firms will be required to include contractual recognition of bail-in terms in all new or materially amended liabilities from the end of the transition period. In these excepted areas compliance with new rules will be expected from 1 January 2021.

The TTP will not apply where there is already a specific transitional or saving provision (eg the temporary recognition and permissions regimes, the financial services contract regime and the use of credit ratings). For firms in the temporary permission regime or the supervised run-off regime, there are alternative specific transitional reliefs available.

The regulators intend to make the final TTP directions towards the end of the transition period.

To assist firms, the FCA has published an updated version of the FCA Handbook to show the rules, including changes made through the onshoring process (eg binding technical standards), that will become applicable at the end of the transition period. Firms will be able to see which changes are applicable to them by reviewing the new FCA Handbook site, as well as the updated TTP information provided by the FCA and BoE and PRA.

However, all of the regulators stress that the onus is on firms to determine which parts of the TTP apply to their businesses. Firms need to review the details of those areas not covered by the TTP to ensure they are ready for compliance at the end of the transition period. For those areas covered by the TTP, March 2022 may seem to be a long way in the future, but where significant system changes are required the timeframe may prove to be challenging, especially with the ongoing COVID-19 situation.