The UK has given the first real look at what it intends to do with its financial regulatory regime once it leaves the EU’s economic arrangements at the end of the year – and, in short, it is not that different to now. 

What is happening?

The UK is getting ready for life outside the EU and is starting to adjust its regulatory regime to suit national interests. That includes maintaining trust in the City of London, but also in being mindful of rules, which banks will welcome. 

Reg rage – acceptance

On June 23, UK finance minister Rishi Sunak delivered to the UK parliament some of the coming changes to the regulatory regime, involving discontinuing some aspects of the EU’s regulatory framework and not implementing others parts that are not due to start until 2021 at the earliest.

Some of the highlights include establishing a new Investment Firms Prudential Regime that mirrors the EU’s Investment Firms Regulation and Directive and the Capital Requirements Regulation II. 

The UK will transpose parts of the Capital Requirements Directive V that it has to do this year, but will apply discretion on aspects that do not go live until 2021 and after, such as as Minimum Requirements for Own Funds and Eligible Liabilities. 

In terms of capital markets, the UK will not implement the EU’s new settlement discipline regime in the Central Securities Depositories Regulation, which applies from February 2021, with firms instead continuing to apply the existing industry-led framework. 

The reporting obligation in the EU’s Securities Financing Transactions Regulation for non-financial counterparties (NFCs) starting from January 2021 will not be enforced. The UK believes that the trading activities of NFCs are sufficiently captured by other financial counterparty reporting obligations.

The benchmarks regulation will be amended to ensure continued market access to third-country benchmarks until the end of 2025. The Market Abuse Regulation will be changed to confirm that issuers and those acting on their behalf must maintain their own insider lists and to change the timeline issuers have to follow when disclosing certain transactions by their senior managers. 

The Packaged Retail Investment and Insurance-based Product Regime is to be improved to address risks of consumer harm.

The UK has said it will complete the implementation of the European Market Infrastructure Regulation (Emir) to improve trade repository data so that smaller firms can access clearing on fair and reasonable terms.

Consultations on most of these proposed changes will be open to the industry, giving it an opportunity to potentially shape some of the rules. 

Why is it happening? 

The statements were made to help give financial firms some clarity over the future shape of the UK’s regulatory framework before the end of the transition period on December 31. 

The overall message is that the UK is determined to maintain London’s position as a leading global financial centre. For example, UK regulators will be required to account for the competitiveness of financial services when drafting rules. 

The UK also restated its strong support for global regulatory frameworks such as those set by the Basel Committee on Banking Supervision and the Financial Stability Board, which support the international trade in financial services. 

What do the bankers say? 

Overall, financial services companies were pleased with the changes because they mostly make compliance easier. Insiders are also encouraged by the fact that the UK Treasury and regulators will consult extensively over the future shape of the regime. 

But the proposed tweaks do raise new questions. For example, when it comes to Emir, how will the UK apply the Frandt (fair, reasonable, non-discriminatory, and transparent) principle? Will it differ significantly from the EU authorities’ approach? 

Banks will also be conscious that this marks the start of a steady divergence from the EU, meaning that they will be complying with two increasingly different sets of rules and reporting requirements as the years go by. That, of course, could mean regulatory fragmentation and higher operating costs.  

Nonetheless, dealing with one jurisdiction that is keen to maintain its lead in financial services likely means a more flexible approach to supervision and one that is more sensitive to the industry’s concerns. 

Will it provide the incentives?  

Outlining the shape of UK rules in the short term after leaving the EU’s economic arrangements is certainly helpful for bank planning. Banks will also be relieved by the absence of anything radical. For example, there is little evidence of the UK looking to pursue a rampant deregulatory agenda. 

Overall these first few moves appear to be supportive of the City of London. 

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