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Freshfields Risk & Compliance

| 7 minutes read

Beyond transition – some clarity on UK financial services reforms

In a series of ministerial written statements, consultations and discussion papers, HM Treasury and the Financial Conduct Authority (FCA) have provided some welcome clarity as to what the UK's financial services regulatory landscape will look like after the end of the EU transition period and how the UK will deal with some of the key EU initiatives where implementation straddles, or falls after the end of, the Brexit transition period. 

This blog considers some of the main policy changes coming out of the various publications.

The Chancellor published a written statement providing an update on the UK’s approach to implementing financial services regulatory reforms before the end of the transition period. The Chancellor stated that in respect of EU legislation that will come into force after the transition period the UK will tailor its approach to implementation to ensure that this suits the UK market and that the Treasury is considering how to implement aspects of such files.

The UK Government will:

  • consult in H2 2020 on its approach to the next phase of its financial services future regulatory framework review which will look at how financial services policy and regulation are made in the UK, including the role of Parliament, the Treasury and the financial services regulators;
  • bring forward the Financial Services Bill (FS Bill), aimed at ensuring the UK maintains its world-leading regulatory standards and remains open to international markets. In addition the FS Bill will ensure long-term market access between the UK and Gibraltar for financial services firms based on shared, high standards and simplify the process that allows overseas investment funds to be sold in the UK;
  • update prudential requirements to enable the implementation of a new prudential approach for investment firms and to update the regulation of credit institutions, including by the implementation of Basel III standards;
  • maintain sound capital markets by considering how to take forward implementation of EU legislation on capital markets. The Government will consider the future approach to the UK’s settlement discipline framework but will not implement the EU's new settlement discipline regime set out in the Central Securities Depositories Regulation (due to apply in February 2021) and UK firms should continue to apply the existing industry-led framework. In addition the Government has decided not to take action to incorporate into UK law the reporting obligation of the EU’s Securities Financing Transactions Regulation for non-financial counterparties (due to apply in January 2021);
  • set out further details in due course on upcoming legislation (including amendments to the Benchmarks Regulation, amendments to MAR, legislation to improve the functioning of the PRIIPS regime and legislation to complete the implementation of EMIR 2.1); and
  • manage upcoming risks by using the FS Bill to introduce amendments to the on-shored Benchmarks Regulation to ensure that FCA powers are sufficient to manage an orderly transition from LIBOR.

Prudential standards

The Treasury published a policy statement (PDF) setting out an update on the proposed approach to legislating on updating prudential standards so as to implement Basel 3.1 and a UK version of CRR 2. The Government will also legislate to introduce a new prudential regime for investment firms.

The EU will introduce further elements of the Basel framework through CRD 5 (required to be transposed by 28 December 2020) and the CRR 2. However, although some parts of CRR 2 will apply before the end of the transition period, a number of provisions will apply from June 2021, so these elements will not automatically apply in the UK. Most Basel 3.1 revisions are not included in CRD 5/CRR 2.

As part of the FS Bill, the Treasury is legislating for new UK frameworks to update prudential rules for banks and to introduce a new investment firms prudential regime (IFPR). The Treasury will delegate responsibility for the implementation of firm requirements to the regulators, subject to an enhanced accountability framework through the imposition of additional requirements for the regulators to consider when using their rule-making powers. When consulting on rules, the regulators will be required to set out how these new requirements have been taken into account. The Treasury also intends to include additional detail in the legislation which will specify the IFPR’s overarching objectives. The vast majority of the updated banking regime will be implemented in PRA rules, and the vast majority of the IFPR will be implemented in FCA rules.

The Treasury notes one proposed deviation from the IFD/IFR when legislating for the IFPR. The IFD/IFR require systemic investment firms to re-register as non-deposit-taking credit institutions. Given that the PRA is the relevant supervisor of both systemic investment firms and credit institutions in the UK, the Treasury and the PRA do not intend to require such firms to apply for authorisation as credit institutions since it is considered that the existing PRA designation framework achieves the same outcomes sought by the IFR.

The Government proposes to introduce the IFPR and the updated prudential rules for banks in line with the intended outcomes of the EU IFD/IFR and CRR2. It will endeavour to introduce the IFPR and updated prudential standards for banks by Summer 2021, broadly consistent with the EU. However, the timing will be dependent on the passage of the FS Bill through Parliament.

BRRD 2 transposition

The Treasury has published a consultation (PDF) on the UK’s approach to the transposition of BRRD 2 (required by 28 December 2020). The deadline for comments is 11 August 2020.

The Treasury notes that is not intending to transpose the requirements that do not need to be complied with by firms until after the end of the transition period, in particular the revisions to the MREL framework (the deadline for compliance with end-state MREL requirements is 1 January 2024). The Treasury notes that the UK has in place an MREL framework in line with the international TLAC standards. In considering the transposition of BRRD 2, the Government will build upon the UK’s current resolution regimes.

The consultation seeks views on areas where a policy choice remains in transposition and does not attempt to cover all aspects of transposition. HM Treasury is consulting upon:

  • the introduction of the concepts of ‘resolution entities’ and ‘resolution groups’ which derive from the same terms used in the TLAC standard;
  • the power for the Bank of England (BoE), as resolution authority, to prohibit certain distributions, where the entity fails to meet its combined buffer requirement, when considered in addition to its MREL requirements;
  • the power for the BoE to suspend any contractual payment or delivery obligations after a firm is deemed failing or likely to fail, but before entry into resolution;
  • restrictions on the selling of subordinated eligible liabilities to retail clients;
  • amendments to the requirements on the contractual recognition of bail-in, to address circumstances in which it would be legally or otherwise impractical to include a contractual term; and
  • a requirement for entities to include, in financial contracts governed by third country law, a term by which the parties recognise that the financial contract may be subject to the exercise of powers by the resolution authority to suspend or restrict obligations.

UK investment firms legislation

The FCA has published a discussion paper (PDF) on implementing a new prudential regime for UK MiFID investment firms (the IFPR), marking the first step in introducing a set of prudential rules for investment firms to reflect their business models and the risk of harm they pose to consumers and markets. The paper applies to current UK MiFID investment firms except for the eight large investment firms which are regulated by the PRA. The deadline for comments is 25 September 2020.

The FCA states that it 'supported the overall goals' of the EU IFD/IFR and proposes to introduce a UK regime that will achieve similar intended outcomes as the IFD/IFR while taking into consideration the specifics of the UK market. The discussion paper sets out the technical details of, and the FCA's initial views on, the EU IFD/IFR. The FCA confirms that it will not implement the IFD/IFR as the Government intends to legislate to introduce a new prudential regime for UK investment firms.

Major changes described in the discussion paper include:

  • an update to the initial capital required for authorisation;
  • changes to the rules on the definition of capital;
  • new own funds requirements, including the introduction of the K-factor approach;
  • new rules on prudential consolidation, group risk and concentration risk;
  • applying liquidity requirements to all investment firms;
  • a new approach for investment firm’s internal risk and prudential assessments, and the supervision of those requirements
  • new requirements on remuneration policies; and
  • changes to reporting and disclosure requirements.

UK Benchmarks Regulation 

The Chancellor published a written statement on proposed amendments to the UK on-shored version of the Benchmarks Regulation, which aim to give the FCA enhanced powers to manage and direct any wind-down period prior to eventual LIBOR cessation in a way that protects consumers and/or ensures market integrity. 

The Government recognises that the interim timetable for transition has been slowed by COVID-19 but also that the market must continue transitioning actively away from LIBOR, thereby leaving behind only those contracts that genuinely have no (or inappropriate) alternatives and no realistic ability to be renegotiated or amended (tough legacy contracts).

The new powers proposed will be available where the FCA has found that a critical benchmark is not representative of the market it seeks to measure and representativeness will not be restored. These could help manage and direct an orderly wind-down of critical benchmarks such as LIBOR. 

The Government intends (in the forthcoming FS Bill) to:

  • amend the UK’s on-shored Benchmarks Regulation to ensure that it can be used to manage different scenarios prior to a critical benchmark’s eventual cessation and that the FCA powers are sufficient to manage an orderly transition from LIBOR;
  • extend the circumstances in which the FCA may require an administrator to change the methodology of a critical benchmark and clarify the purpose for which the FCA may exercise this power;
  • strengthen existing law to prohibit use of an individual critical benchmark where its representativeness will not be restored, whilst giving the regulator the ability to specify limited continued use in legacy contracts; and
  • refine other areas of the UK’s regulatory framework for benchmarks to ensure its effectiveness in managing the orderly wind down of a critical benchmark, including that administrators have adequate plans in place for such situations.

The Government sets out that parties who rely on regulatory action, enabled by this legislation, will not have control over the economic terms of that action nor will regulatory action be able to address all issues or be practicable in all circumstances.

The FCA has welcomed the Government's statement and plans to publish statements of policy on its approach to potential use of these powers following further engagement with stakeholders in the UK and internationally.

The Government, the FCA and the BoE will continue to work closely to encourage market-led transition from LIBOR and to monitor progress.


europe, regulatory, financial institutions, regulatory structuring, prudential requirements, capital and liquidity