The FCA’s approach to Brexit: our preparations and our vision for the future

Speaker: Nausicaa Delfas[1], Executive Director of International
Event: Bloomberg/TheCityUK, London
Delivered: 19 July 2018
Note: this is the speech as drafted and may differ from delivered version

Introduction

It has been a remarkable year in international affairs – dominated by change. So, I would like to take a step back today and offer a few reflections on an area which I know matters to many of you, and where we aim to give you some consistency: the FCA’s preparations for the UK’s withdrawal from the EU.

Since my appointment earlier this year, I have been meeting many of you, regulated firms in the UK, and your advisers, business groups and corporate treasurers, as well as my regulatory counterparts in Europe, US and Asia, and consumer representatives. I have valued hearing directly from you about the impacts and issues for you, in the withdrawal of the UK from the EU, and using these insights to shape FCA’s approach and preparations. I have also been building up the International Division at the FCA, to ensure we can drive forward the policy and delivery work that is required.  And as a member of the FCA’s Executive Committee, I have been working with my colleagues to balance this work against the FCA’s other priorities, of regulating 58,000 firms. It is certainly a most interesting time to be in this role.

So today I will set out:

• how we at the FCA are preparing, behind the scenes, for a smooth transition
• what we expect from firms we regulate, and
• our future vision

I should preface my comments by reiterating that the FCA takes no position on whether Brexit is a good or bad thing in itself. Our focus, as always, is on making financial markets work well, and meeting the FCA’s three statutory objectives, to:

• Secure an appropriate degree of protection for consumers.
• Protect and enhance the integrity of the UK financial system.
• Promote effective competition in the interests of consumers.

And to deliver on these objectives we will support the Government throughout the Brexit process with technical advice and our specialist expertise.

In summary:

• With 8 months until we exit the European Union in March 2019, it is important we all – regulators and industry – continue to plan for a range of scenarios.
• The FCA is working closely with the Government, Bank of England, our regulatory partners across the world, and firms, to enable a smooth transition at exit.

In terms of our longer-term future – our markets will remain highly integrated whatever the outcome of Brexit. We believe a good outcome is achievable – one that is in the interests of both the UK and the EU.

Preparing for a smooth transition

Our starting assumption is that a transition or implementation period, from March 2019 until the end of December 2020, will form part of the final agreement with the EU. We think this is a good thing for both sides. It will allow more time to prepare, smooth the transition, and it is something we have been calling for, for some time.

However, we know that this is part of the overall negotiations and therefore we must prepare for all scenarios, including the possibility of a ‘no-deal’ or ‘hard’ Brexit at March 2019. And that is what we are doing: across the FCA, together with colleagues from the Bank of England and the Government, we have been working to develop a number of safeguards and contingencies, in the event of a hard Brexit, to ensure that ‘day 1’ works smoothly.

Let us just consider some examples of the challenges we face in doing this – there are ‘cliff edge’ risks that would be caused by abrupt loss of passporting. Some are within our gift to resolve, others are not, and require agreement with the EU.

‘Cliff edge’ risks

There are ‘cliff edge’ risks we face in relation to contract continuity.

Our analysis suggests that these primarily relate to insurance contracts and derivatives. The FPC has estimated that 10 million UK policyholders and 38 million EEA policyholders could be affected; and that around a quarter of derivatives contracts – £26 trillion worth – could be affected.

However, the types of contracts affected may be broader than this. You in this room will know well how complex these contracts are, involving not only financing and credit agreements, but also hedges against interest rates and currency movements.  Our view is that where any of these contracts extend beyond March 2019, the UK and the EU must, together, create contractual certainty, either through an implementation period or by some other means.

If this is not achieved, there is a risk that some of these contracts could not be appropriately serviced – in concrete terms, insurers may not be permitted to pay out claims on policies, and derivatives users may not be able to manage the risks of their positions. This would not enhance the integrity of markets, nor serve the interests of consumers, either in the UK or in the EU.

This is an example of a situation where both sides could take unilateral approaches to dealing with the risk (and I will talk later about what in the UK the Government has proposed to do with regard to that), but where a bilateral solution with the EU would be preferable. We remain closely engaged with our EU27 regulators and ESMA, both on the day to day business of being an EU member, but also on issues related to EU withdrawal. For example, we are participating in a technical group set up by the Bank of England and the European Central Bank which is taking account of potential Brexit risks, including contract continuity, and which we strongly welcome.

Legal and Regulatory Framework

In other areas, we and the Government are taking action to smooth the transition in the UK, unilaterally, regardless of the outcome of the negotiations.

For example, to ensure continuity of the legal and regulatory framework post withdrawal, when EU law ceases to have effect in the UK, we have undertaken significant work around the EU Withdrawal Act. Now this Bill has received Royal Assent, existing EU legislation will be converted into UK law after March 2019, and UK laws which implement EU obligations will be preserved. The aim is that, as far as possible, to ensure continuity and certainty, the same rules and laws will apply after exit day as they did the day before.

In addition, the Withdrawal Act also gives Ministers the power to amend retained legislation via Statutory Instrument (SI), ensuring it functions effectively post-Brexit.  HMT laid three SIs earlier this week.

Accordingly, we at the FCA have been working over the past months on identifying the various aspects that may need amending, and how these might be resolved. The most obvious examples are references to the Commission, or European Supervisory Authorities, which will have no jurisdiction here after Brexit; others include functions currently performed by EU bodies which will no longer be appropriate when UK leaves the EU (eg supervision of credit ratings agencies and trade repositories); or the broader impact of loss of passporting (which led to our preparatory work on the Temporary Permissions Regime, which I will cover in more detail shortly).

The changes in the legislation through Statutory Instruments will also mean changes to our rule book. We have been undertaking a line by line review of around 50 pieces of EU financial services legislation, and 185 Binding Technical Standards (the technical detail below the EU Directives and Regulations).

We aim to consult on these changes in the autumn. This will ensure our Handbook and associated rules are fully operational at the point of exit.

In the run up to March 2019, we will limit any other Handbook changes to those that are in line with our Business Plan, or otherwise essential.

Temporary Permissions Regime

A further key safeguard we have been working on is the Temporary Permissions Regime (TPR), which will allow EEA firms and funds using a UK passport to continue to operate, without needing to apply for authorisation at this stage. At the end of last year, HMT announced that they would legislate to enable this if necessary.

The TPR will allow for business as usual for EEA firms and funds passporting into the UK. As at April this year, more than 8,500 financial services firms were registered as passporting into the UK, and nearly 6,000 out of the UK. Those that receive a temporary permission will be able to enter into new business and fulfil existing contracts with UK customers for a defined period after exit day, while seeking full authorisation. We will be issuing more communications on what firms will need to do in order to register for temporary permission, and we will be consulting on the related rules. So far, we have issued a short survey on our website which allows firms to indicate their intention to do so. I would like to thank our colleagues in National Competent Authorities across Europe for helping us to draw this to the attention of firms based in their jurisdictions that passport in to the UK.

Once they have temporary permission, firms will be given a period of time, or ‘landing slot’, within which they’ll need to submit their authorisation application. We will confirm landing slots to firms in due course so they can prepare their applications. We expect the first of these slots to be later in 2019, with the last timed towards the end of the temporary permissions period.

The intention here is to support a smooth transition – and this will certainly help for ‘incoming’ business.   That is the part that is in our gift.

However, we are aware that this work does not necessarily resolve the challenge for all firms, particularly those that need to continue to access the EU – ‘outgoing business’ – as currently there is no reciprocal ‘TPR’ arrangement from the EU. And the challenges this presents, in terms of lack of commercial certainty, and business disruption, is clear from my speaking to senior leaders in regulated firms.

Needless to say, we think this is necessary to provide certainty and smooth the transition, and it is something we stand ready to discuss with our EU counterparts.

Throughout this work, with consumer protection at the front of our minds, we have engaged with the FCA Consumer Panel and other bodies to ascertain their concerns and respond to them accordingly. As part of the onshored legislation, we are seeking to maximise continuity for consumers to the extent possible. The temporary permissions regime will work to remove any interruption of service to consumers of EEA firms.

And this leads me on to our expectations of regulated firms in their preparation for March 2019 and beyond.

The FCA’s expectations of firms

Whilst it is for individual firms to take responsibility for their own plans to ensure a successful transition, our role is to ensure relevant markets work well. We intend to continue to work closely with you on this, including providing guidance to you where we can. As I have said earlier, our focus is to ensure that our objectives are met throughout withdrawal – that we protect consumers, maintain the integrity of the UK financial system,  and promote competition in the interests of consumers. Firms need to maintain threshold conditions and our rules throughout – I thought it would be helpful to set out some of the areas we have been discussing with firms so far:

• If you are expanding your presence in Europe, the structures you put in place must enable us to supervise your UK business effectively, and ensure that you continue to meet our threshold conditions.
• Just as you are making preparations, have you checked that your supply chains are similarly prepared?
• If you are relocating senior management, are you ensuring that appropriate senior oversight remains in the UK?
• We expect you to continue to service your customers as fully and fairly as the law permits, and to communicate with affected customers, in the UK and elsewhere, in a clear and timely fashion, including, for example, what regulatory protections will apply for your customers.

We regulate 58,000 firms. My observation from my engagement with firms, our Panels, and industry groups is that overall, many firms are advanced in their contingency planning.

This morning, we published a webpage Preparing your firm for Brexit[2], aimed at helping firms to understand whether they will be affected by EU withdrawal, and if so, to:

• Work out what changes you might have to make to your business, or which additional regulatory permissions you may need to continue to carry it out.
• Think about any information you will need to give to customers, in a way that is clear, fair and not misleading.
• Consider the implications of a range of possible scenarios including an implementation period.
• Discuss implications with the relevant EEA regulator, your trade association, and/or get independent legal advice.

I have spoken so far about how we get to ‘day 1’ – the exit from the EU. I would now like to turn to our future vision for the longer term.

Future vision

We face challenges in the short term – but the fundamentals are strong for us to continue to have a close relationship with our EU counterparts over the long run.

At day one, our regimes will be equivalent. Our markets will remain highly integrated whatever the outcome of Brexit, and we think working to promote common global standards, alongside our work to onshore a rulebook that is equivalent to the EU on day one, provides a solid basis for cross border business to take place.

It is of course for the Government to negotiate – but we have been clear about the sort of arrangements on financial services that we believe are possible, and desirable, to maximise market access and benefits to consumers in the UK and EU. These include the five principles of:

• cross border market access
• consistent global standards to support global markets
• co-operation between regulatory authorities
• influence over standards
• the opportunity to recruit and maintain a skilled workforce

Neither the UK nor the EU want to see a significant misalignment in regulatory standards – nor indeed ‘a race to the bottom’ in regulatory standards.  But it is likely that after our exit from the EU, our regulatory frameworks may evolve.  So we need to find a way to ensure that despite such evolution, frameworks allow delivery of common outcomes.

Common outcomes should be the criteria by which we judge one another’s regulatory position, and thus the access that we are prepared to grant to one another’s markets. What matters more is not what road we take, but what that final destination is – and as long as the UK and the EU maintain a commitment to protecting consumers and to strong, open markets, there is no reason this cannot work in practice.

This is a clearly achievable aim. Not least because it is overwhelmingly in the interests of both the UK and EU: it is in the interests of UK and EU consumers; it is in the interests of UK and EU firms; it is in the interests of UK and EU markets. We hope that we can see progress on this in the very near future.

The Government last week published its White Paper on the future relationship with the EU, laying out the main elements of the UK position. The financial services chapter proposes: that the UK and the EU provide access to each other’s markets on the basis of equivalence of rules on an outcomes basis, across a broad scope of activities, and on the basis of predictable processes and governance arrangements.

At the supervisory level, we have deep relationships with our European counterparts, including information sharing – for example, in an average month we route around 250 million transaction reports to other National Competent Authorities in the EU. We cooperate on common challenges through ESMA and the other European Supervisory Authorities and we work closely on policy issues - hence the common rulebooks we have today. Whilst we will no longer be a member of the EU, we are committed to keeping our relationships as close as possible.

Global influence

Part of the new relationship will depend on how the FCA interacts with the rest of the world. Now, in our preparations, we have started discussions with regulators around the world on our Memorandums of Understanding, agreements that underpin third country equivalence, access and information sharing.

More broadly, we have always played an active role in developing the global standards that we have today. And we are continuing to play that role progressing international regulatory reform at the global level. For example, we have recently proposed a FinTech Network within IOSCO, which we will be chairing; we co-chair the market conduct group on IAIS, and the asset management group in IOSCO.

We have remained closely involved with the work at the Financial Stability Board on asset management and on benchmarks.

And we are working to improve cyber resilience in the face of new threats: I continue to represent the FCA on the G7 cyber expert group, at IOSCO and FSB, and co-chair the CPMI-IOSCO cyber group on that advancing resilience in financial market infrastructures across the world.

Regardless of the future relationship between the UK and the EU, we will still face global challenges that must have global solutions. And accordingly, we remain committed to focusing on working with global partners to find those global solutions.

Conclusion

Yes, the scale of the Brexit challenge is unprecedented, but we believe a good outcome is achievable. And from a regulatory perspective, we are working with the Government, the Bank of England and our counterparts across the world to secure just that.

But we all know that time is tight and the path uncertain – so achieving that outcome, and a smooth transition avoiding cliff edges – requires energy and commitment from industry and regulators alike.

I look forward to continuing to work with you as we move forward.