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Regulatory Approach to Brexit

Thursday 4 January 2024

As you may be aware, the UK voted to leave the EU in June 2016 and the European Union (Withdrawal) Act (EUWA) was passed in June 2018. This piece of legislation will have the effect of transposing EU regulations and directives into UK law on exit day (29 March 2019) should a deal not be reached.

The Financial Conduct Authority (FCA), Prudential Regulatory Authority (PRA) and the Bank of England (BoE) have all published a number of consultations which sets out their general approach to the withdrawal from the European Union. The approaches proposed are broadly similar; however, the two regulators have split the certain specific issues into their respective regulatory remits and have consulted on these separately.

Relevant papers:

ABCUL will submit a response to all parties involved based on feedback received from our members. Please take the time to let us know what you think by Monday 3 December 2018 by emailing enquiries@abcul.org, or calling us on 0161 832 3694 and asking for the Policy Team.

High-level approach

The Bank of England (BoE), PRA and FCA have stated that they are not setting any new policy and their approach to the withdrawal from the European Union will be to only deal with the consequences or ‘deficiencies’ from converting European regulations to UK law. The European Union (Withdrawal) Act (EUWA) allows the Government and regulators to make certain amendments without the need to consult publically or perform a cost benefit analysis.

Despite not being required to consult, the regulators are asking for feedback at this stage. In addition the regulators are subject to statutory limitations on the amendments they are able to make to address any inadequacies arising from the transposition of EU regulation into UK Law.

Implementation period / temporary relief

The regulators have stressed that in the vast majority of cases, firms will not need to act now to prepare for exit day. One reason for this is that an implementation period has been agreed in principle until Thursday 31 December 2020 and the regulators expect that this will provide sufficient time after exit day to make the necessary changes. However, should the implementation period fall through the regulators have stated that they can and will use their powers to provide ‘temporary relief’ for firms by delaying their regulatory ‘onshoring’ (the process of bringing passporting firms into UK regulation).

However, the PRA does not intend to provide this relief to firms in some areas involving the resolvability. In particular, firms that currently passport into the UK will need to meet rules around FSCS protection such as requirements regarding the Single Customer View and begin to calculate total FSCS deposits based on the change of scope immediately from 29 March 2019.

Specific changes relevant to credit unions

EEA investments

The PRA proposes to remove credit union’s access to investments in EEA state credit institutions. Following the reform of the credit union’s rulebook in 2016, credit unions rules provided for credit unions to invest in credit institutions which are authorised in an EEA state to accept deposit, however, new rules will require credit unions to only invest in UK firms. The PRA views this as consistent with its current treatment of third countries which is the relationship the UK will have with EEA states and their firms after exit day in the event of no deal.

According to the PRA, 55 UK credit unions have investments in EEA state banks and all but one of these banks have confirmed that they intend to apply for authorisation in the UK following its exit from the EU. The PRA therefore believes that credit unions will likely be able to keep their funds in these institutions. However, ABCUL is concerned that the PRA’s assumptions in relation to the transferability of these deposits are optimistic and in the case of certain structured deposits may not be possible due to technical aspects of the structure linked to the EEA country of origin.

ABCUL intends to respond to ask the PRA, under their transitional relief approach, to allow credit union investments in EEA states to mature before their repatriation rather than force credit unions to attempt to break these investments after exit day. If you have any deposits in EEA firms we’d appreciate if you could get in touch with ABCUL.

Changes to FSCS

From exit day FSCS will only protect depositors with eligible deposits held by UK firms with part 4A permission to accept deposits. Passported firms are expected to be granted authorisation under the Financial Services and Markets Act (FSMA) as third country firms under a temporary permissions regime which will mean that their UK deposits will be covered by FSCS from exit day. However, due the UK being outside of the Deposit Guarantee Scheme Directive, the ranking of UK deposits in those EEA third country firms may be lower in the creditor hierarchy than at present and depositors holding funds in excess of the FSCS protection limit may be exposed to greater losses.

As a result of Brexit, FSCS disclosure information (including compensation leaflets, stickers, posters, information sheets and exclusion lists) will need to be updated by firms. EEA firms which have obtained part 4A permission from exit day will need to have trained staff, posters and stickers immediately from exit day and will have 2 months to provide their information sheet and exclusions list to their UK customers. However, existing FSCS members such as credit unions will still need to ensure that their information sheet is ‘up-to-date’ however they have not provided any specific deadlines for existing FSCS members.

Conclusion

The majority of changes arising out of the UK’s exit from the European Union will have minimal effects on credit unions directly. It is likely that a transitional period will be agreed upon delaying these changes significant and whilst a deal could be struck that would make these proposal redundant altogether.

However, ABCUL intends to respond to these proposals to ensure that credit unions are well placed to deal with these changes should they come into effect 29 March 2019. In particular, we welcome feedback from our members on the specific points of credit union’s investments in EEA state firms and the changes to depositor protection disclosure materials.