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UK post-Brexit risks analysis – 22 December 2020

UK post-Brexit risks analysis – 22 December 2020

Background

  • Xcina Consulting (XCL) wrote the analysis given here about possible and probable post-Brexit risks during mid-December 2020 and published it as a news update on 22 December.
  • Accordingly, this analysis was written before the 24 December 2020 announcement of a free trade deal having been reached between the UK and the EU with only a few days remaining before the year-end deadline.
  • Nevertheless, most of the analysis topics remain valid as the “EU-UK Trade and Co-operation Agreement” contains almost no clarity for any topics relevant to UK financial services; no clarity will be available until at least the end of March 2021 after another set of negotiations is held between the UK and EU.
  • Our original text is included here (see below) to inform our readers and to support risk considerations within our clients and other firms.
  • Xcina Consulting remains focused on the impacts and risks for UK financial services as well as for broader topics including data protection and data transfers. XCL will provide further updates whenever updates allow this; please keep checking.

Regulatory Updates – 2020 year-end – Brexit points for attention

  • We have all faced many complex months during 2020. Those challenges have included disruption and long-term enforcement due to remote working arrangements and increased diverse challenges for our employees, colleagues, clients, overall operational resilience and business readiness.
  • After so many detailed challenges in such a short period, we hope that you will find some relatively restful time during the next few weeks to refocus and recover where possible.
  • At the same time, none of us can afford to relax too much. January 2021 is also going to be a time of many unavoidable uncertainties.  We must not be complacent.
  • The transition period is almost over for the UK; it is nearly one year since the UK left the European Union (EU). Many important aspects of the UK’s future relationships with the EU remain unresolved. 
  • Financial services have been largely out of scope of the UK-EU negotiations for a new trade deal governing their relationship following UK’s departure from the EU. Instead, future access to financial services markets will depend primarily on unilateral equivalence decisions taken by each party. There remain many major areas of uncertainty.
  • Some changes are already known; many other changes are still unknown for now. All of these changes will begin on 1 January 2021; that is guaranteed.
  • All these risks need to be managed
  • Plan for the worst case and develop adequate contingency arrangements
  • Reach out to us if you want to discuss anything or need any support
  • We at Xcina Consulting will continue to work very hard throughout 2021 to analyse and update guidance as further developments are announced for the future regulatory framework impacting all of us.
  • We remain keen to share our experiences, opinions and practical expertise with you to help you navigate through the changes whenever needed. If you have any questions or concerns at any time, please contact our specialists.
  • On 31 December 2020 at 11pm, the transition period will end by law. From then, EU law and the single market rules will no longer apply in the UK.
  • At the end of the transition period, firms will have substantially the same regulatory requirements as before leaving.
  • HM Treasury has onshored EU legislation and the Financial Conduct Authority (FCA) intends to use its temporary transitional power (TTP) on a broad basis to allow firms more time to adjust to most new requirements.

End of passporting

  • After 31 December 2020, EU law will no longer apply. Passporting for all UK financial services firms will end.  All future business in the EU requires UK firms to negotiate in every EU state, either individually or together if that is possible.
  • For example, the Dutch National Bank (DNB) has already published a statement confirming that UK credit institutions cannot provide current or savings accounts to retail customers in the Netherlands following the end of the transition period.

New rules and regulations – a need for equivalence

  • Although the UK has granted a package of equivalence decisions to the EEA states, providing EEA firms with greater certainty to continue their activities in the UK after 1 January 2021, the EU has not yet reciprocated and granted any equivalence decisions to the UK apart from a temporary decision on central counterparties.
  • The EU is entitled to withdraw any equivalence decision unilaterally at any time. This creates further uncertainty and unpredictability for UK financial services firms.

Points for attention and areas of uncertainty include the following:

Share Trading Obligation

  • The European Securities and Markets Authority (ESMA) and UK Financial Conduct Authority (FCA) have published their respective approaches to Share Trading Obligation (STO) to allow firms to continue to access UK and EU trading venues after the end of the Brexit transition period.
  • Application of TTP in relation to:
  • Intra-group transactions – margining and/or clearing exemption under UK EMIR.
  • Regulated markets – considering EEA trading venues as regulated markets under UK EMIR.

Market-making exemption for EEA firms under UK SSR

  • Certification of EEA credit rating agencies by the FCA
  • Continuing to use benchmarks from EEA Benchmark Administrators.

Financial Services Contracts Regime

  • The financial services contracts regime (FSCR) will enable EEA passporting firms that do not enter the temporary permissions regime (TPR) to wind down their UK business in an orderly fashion.

Derivative Trading Obligations

  • The FCA remains open to further dialogue with ESMA on how to minimise any disruption created by overlapping EU and UK requirements.

Continuation of supporting services to EEA-resident customers

  • UK firms need to understand all relevant EU local regulations and take legal advice. There may be disruption to business activities, and related adverse publicity if customers are disadvantaged.

Open Banking Certificates

  • Open banking certificates for identification are currently covered under eIDAS and, UK payment service providers’ eIDAS certificates will be revoked on 31 December 2020. Although the FCA has published near-final rules to allow the use of other certificates in future, this transition period will probably end in June 2021.

Trade/transaction reporting

  • The UK’s transaction reporting regime under MiFID II will change because of Brexit, including connected obligations such as the requirement to submit financial reference data. This includes the need for trading venues to report for transactions on their venues by their EEA members, and EEA firms in the TPR who operate through a UK branch to start transaction reporting to the FCA.

Fund management delegation activities

  • Both ESMA and the FCA have confirmed that the multi-lateral memorandum of understanding (MoU) agreed with the ESMA and other EU regulators in 2019 will remain appropriate and effective, allowing the delegation of portfolio management to continue after the end of the transition period. However, further clarifications are expected on specific issues.

Data protection and data transfer

  • Data protection is very important for all business activities. All firms must think about where data are processed and stored.  The UK has confirmed the acceptability of firms transferring data to the EU but there has so far been no reciprocal confirmation that the UK would be “adequate” for continuation of data transfers from the EU.
  • If the EU does not grant data adequacy to the UK, companies that want to transfer data from the EU to the UK may not have a legal basis on which to do so. This will affect hundreds of thousands of companies.  Until such equivalence is granted, firms will need to put in place alternative arrangements to comply with GDPR and ensure a high standard of protection for individuals’ personal data.

UK professional qualifications for UK individuals

  • Depending on the deal that is reached between the UK and EU, UK professional qualifications may not be recognised in the EU after the transition period.
  • This will affect a range of professions including lawyers, bankers, accountants and investment management so that those wishing to practice their trade in the EU after 31 December 2020 may need to requalify in the EU.
  • Rules on whether UK qualifications will be recognised and who is eligible to hold certain professional roles vary between EU member states; many, including Belgium and Luxembourg, allow only EU citizens to qualify.

Timeline with relevant dates to be logged on regulatory calendar

  • The next EU-UK clarifications are expected by 31 March 2021

Next steps

All firms need to continue their detailed planning and research for all impacts on their business activities, employees, stakeholders and clients.

If anyone has specific questions or needs any advice, contact our experts.