Brexit - regulations and guidance
Implementation [IP] or transition phase: 1-Feb-2020 to 31-Dec-2020 - same rules as before exiting the EU
Temporary Transitional Power [TTP] phase: 1-Jan-2021 to 31-Mar-2022 - “onshored” regulations apply, which unless otherwise specified, are that applicable/decided as on 31-Dec-2020
Fully migrated phase: 1-April-2022 onwards - UK regulations that are fully “onshored” and updated to meet UK legislative and regulatory requirements.
The United Kingdom exited the European Union (EU) on 31 January 2020. Following which, we entered the transition phase (also called implementation phase) that ends on 31 December 2020 [Implementation (IP) Completion Date]. During this period, the EU law continues to apply to banks as it was applied prior to UK exiting the EU. After this period, we enter ‘Temporary Transitional Power’ (TPP) phase for 15 months ending on 31 March 2022, where the rules that were decided and applicable as on 31 Dec 2020, unless otherwise specified, will be applicable.
One of the key elements of the European (Withdrawal Act) 2018 is the “onshoring” of EU regulations (e.g. Capital Requirements Regulations 2 (CRR2)) into UK law and preserves existing UK law that was introduced to implement EU Directives (e.g. Capital Requirements Directive V). This onshoring exercise is also referred to as “Nationalising of the Acquis”.
HM Treasury has delegated power to the Bank of England (BoE) and Prudential Regulation Authority (PRA) to make amendments to existing rules and onshoring the binding technical standards (BTS) within their remit. To this effect the PRA have published a number of
policy statements (e.g. PS30/20 - The Bank of England’s amendments under the European Union (Withdrawal) Act 2018: Changes before the end of the transition period);
supervisory statements (e.g. SS2/19 - PRA approach to interpreting reporting and disclosure requirements and regulatory transactions forms after the UK’s withdrawal from the EU)
consultation papers (e.g. CP13/20 - The Bank of England’s amendments to financial services legislation under the European Union (Withdrawal) Act 2018); and
technical standards (e.g. The technical standards (Capital Requirements) (EU exit) (no. 4) instrument 2020).
These in effect give guidance on the rules as it would apply during the IP phase (up to 31 Dec 2020) and TTP phase (from 1 January 2021).
Due to Brexit, there is a significant shift in the way governance, responsibilities and approach to regulations are onshored. However, from a general practitioner’s perspective, in the near-term [Temporary Transitional Power Phase - until 31 March 2022], the way the regulations and guidance are approached will continue to be in line with the existing rules for small- and medium-sized banks. The key aspects to be noted for the TTP phase are:-
EU directives and regulations are replaced by relevant onshored UK implementing legislation
Stand-alone references to EU or EEA should now refer to UK
Exposures to EU countries entities will receive preferential treatment (e.g. EU sovereign exposure will continue to be risk weighted at 0%, irrespective of the credit rating [Article 114(7) of CRR)
Exposure to EU banks and investment firms, will continue to considered as equivalent to UK exposures [EU exposures meet Article 107(2) and (3)]
Large exposure and credit risk evaluation are not impacted for EU exposures
For Liquidity Coverage Ratio (LCR), the EU assets that qualify for high quality liquid asset (HQLA) will continue to be eligible [e.g. EU sovereign debt will qualify as HQLA Level-1 asset, irrespective of its credit rating]
Limits that are currently set in Euro (e.g. large exposure limits of EUR 150 million or SME company turnover of EUR 50 million) will continue to be applied in Euro until notified
Credit Rating Agency (CRA) - the EU credit rating provided by an eligible external credit rating agency are considered as equivalent, subject to specific condition, for up to 1 year (i.e. 31st Dec 2021) from IP completion date. After this, only CRAs that are registered with the FCA to provide CRA services in UK are likely to be eligible.
Single Customer View (SCV) reporting - Field 39 [Account Branch jurisdiction] and Field 40 [BRRD marking] are to be updated for non-UK branches of the bank located in EU. The branch jurisdiction can only be UK or Gibraltar (earlier, it could have been any EU country).
These exceptions for EU exposures are only applicable until 31 March 2022. After this period, unless HM Treasury finds a positive equivalence for EU exposures, these might have to be treated differently.