..continue to prepare ahead of the UK’s exit from the transition period, and not be complacent;.. ensure that our regulatory approach to financial services remains effective and appropriate now that we have left the EU;
and we will build on our global role outside the EU, whilst demonstrating our continued commitment to open markets, free trade, and the highest international standards of regulation.
2020 has been a significant year. On 31 January 2020, the UK left the
EU. A few weeks later, impacts of the Covid-19 pandemic were felt here
and across the world.
And when this year draws to a close, on 31 December 2020, at 11pm,
the transition period will end, and the UK will enter into a new phase,
when EU law and the rules relating to the single market will no longer
apply in the UK – and this is the focus of the conference today.
The Chancellor set out his ambition for UK financial services this
week, including extending its global leadership in green finance and
financial technology – and in this the FCA will play an important role.
Before I come to this, I will look at the near term – preparations
for the end of the transition period, which is only seven weeks away,
and remaining risks.
Preparing for the transition period
Having been a member of the EU for nearly 50 years, and having
incorporated EU laws and regulations into our statutes and regulatory
rule books, the UK has a regulatory regime that is the most equivalent
to the EU’s in the world.
As such, agreements on mutual equivalence should clearly be possible.
However, apart from a temporary decision on central counterparties, no
equivalence arrangements have currently been made by the EU.
Negotiations continue between the EU and the UK, but as you know, the
outcome remains uncertain. We should not assume, even if a deal is
agreed, that it will mitigate outstanding risks in financial services.
We have been taking
steps to prepare for all scenarios at the end of the transition period,
to minimise disruption to the extent we reasonably can – and have been
supporting firms to do the same.
Our Brexit preparations, alongside those made by other UK authorities
and firms, have led the Financial Policy Committee (FPC) to conclude in
its latest October report
that “most risks to UK financial stability... at the end of the
transition period had been mitigated”. But FPC does not rule out market
disruption, as the UK transitions to new trading arrangements with the
EU.
That is why we have been taking steps to prepare for all scenarios at
the end of the transition period, to minimise disruption to the extent
we reasonably can – and have been supporting firms to do the same.
I will run through some of these preparations before covering some remaining risks.
Last week, we set out our approach to the Share Trading Obligation,
in the absence of mutual equivalence. We confirmed that we will allow
firms to continue to access UK and EU trading venues. This will ensure
UK-based investors and asset managers continue to have the freedom to
find the best possible trading terms, and to get the best outcome for
themselves and their customers.
We want to preserve freedom for issuers from all jurisdictions to
choose where and how to raise capital to support their business
activities. However, we strongly believe that mutual, outcomes based
equivalence is possible.
This week, the Chancellor announced that HM Treasury (HMT) will unilaterally grant the EU a wide range of equivalence determinations. The
decisions cover various activities and will provide certainty to firms
and their clients and counterparties. In some instances, the decisions
will enable UK firms to continue using EEA products and services, and in
others they will avoid increased cost and complexity for firms. Firms
should consult the full list of decisions, and further information on
the FCA’s website.
We are finalising our work with HMT to onshore EU legislation, which
will ensure at the end of the transition period that firms have
substantially the same regulatory requirements as before we left. So
far, HMT has made over 60 Statutory Instruments relevant to the FCA and
we have published almost 2000 pages of Handbook and Binding Technical
Standards changes connected to EU withdrawal.
We have made significant updates to our Handbook website to give firms a clear view of what rules will look like after the transition period.
Mindful of the number of new rules, we announced in early October that we would use our Temporary Transitional Power widely to allow firms more time to adjust to most new requirements.
In addition, we are building and preparing to switch over to new
technology systems to implement onshored legislation and to take on
supervisory responsibilities for firms previously regulated at EU level,
like credit rating agencies and trade repositories.
As passporting will end on 31 December 2020, together with HMT, we have put in place a series of temporary regimes, such as the Temporary Permissions Regime -
these will allow approximately 1500 non-UK firms and fund managers to
operate in the UK immediately after the transition period.
Alongside the Financial Services Contract Regime,
these will help resolve many of the cliff edge risks we would otherwise
have faced, and have helped provide certainty to firms and markets.
We launched a consultation on our expectations and approach to
authorising overseas firms, where we explain what we would look for when
assessing firm applications. This will ensure that our regulatory
framework allows EEA and other overseas firms to operate in the UK on a
secure basis over the longer term, under predictable expectations, while
limiting any risks of harm to consumers and markets.
To ensure continued cooperation with our counterparts after the end
of the transition period, we have negotiated almost 80 Memoranda of
Understanding with the European Supervisory Authorities and regulators
from around the world. These will come into effect at the end of the
transition period and allow us to continue to effectively supervise
cross-border activity.
And we continue to engage with firms on their preparations. Of
course, we recognise that firms are also responding to the ongoing
impact of Covid-19, most recently with the second national lockdown
implemented last week. However, the end of the transition period is
coming, and it is vital that firms continue in their preparations for
it.
Moving to some remaining ‘cliff edge’ risks.
In the absence of mutual equivalence, some firms will be caught by a
conflict between the EU and UK Derivative Trading Obligations,
potentially hampering their ability to trade derivatives where they see
fit. We remain open to discussing with ESMA how to minimise any disruption that could arise as a result of overlapping requirements on financial counterparties.
Other risks cannot be resolved through mutual equivalence. Chief
amongst these is the risk that UK firms may not be able to continue
servicing EEA-resident customers after the transition period ends. There
is no EU-wide version of the UK’s Temporary Permissions Regime.
Many of the temporary measures previously put in place by EEA
countries to prepare for a ‘no deal’ exit have lapsed. So, UK based
firms wanting to continue servicing customers in the EEA from 1 January
2021, will need to ensure they meet local laws and regulators’
expectations by that date.
Firms must speak to local regulators as appropriate, obtain
permissions, and repaper contracts where necessary. We expect all firms
to treat customers fairly throughout this process.
There is no data adequacy decision as yet, so firms need to be
prepared, to ensure personal data can be transferred from the EU to the
UK – for example, through appropriate use of contractual clauses.
What all this means is that we all need to prepare for 1 January
2021. I urge you to take all reasonable steps to be ready ahead of exit
day, for all scenarios. Your previous ‘no deal’ planning should stand
you in good stead, but there is no room for complacency.
Looking ahead: getting ready for a new environment
Looking ahead to the new year:
• the UK’s new regulatory framework;
• our role on the global stage; and
• UK’s future trade and market access.
The UK’s regulatory framework
After 1 January 2021, when EU law, and the EU regulatory structures,
cease to apply in the UK, there will need to be a “resetting” of how
financial services regulation will be made in the UK.
To this end, HMT is reviewing the UK’s future regulatory framework,
and last month published a first consultation, proposing a split of
roles and responsibilities between the Parliament, the Government and
the regulators, which will see the transfer of more rule-making powers
to the regulators.
These proposals should create a more agile and responsive regulatory
system - we welcome this, as it should enable us to respond flexibly to
market developments and changes in society, to protect consumers from
harm and to ensure markets work well.
And this flexibility needs to be balanced with our accountability,
and maintaining proper democratic oversight of our work and our
decisions. We look forward to discussing these issues with our
stakeholders in the coming months.
Wherever we land on the regulatory framework, the FCA will continue
to support openness and high regulatory standards, which together form
the foundation for vibrant markets, and ensure that the real economy can
access capital in both difficult and more normal times.
The
FCA will continue to support openness and high regulatory standards.
As is the case with any jurisdiction, we will develop our rules where
appropriate for our markets, whilst considering the impact on industry –
this is the approach we and HMT have adopted in developing the UK’s
prudential regime for investment firms, which achieves outcomes similar
to the EU regime whilst taking into consideration the specificities of
the UK investment firm market.
Similarly, we will continue to work closely with HMT on other aspects of the Financial Services Bill (FS Bill) to maintain openness and high standards.
This is true in terms of the rules we make domestically, but also in
terms of how we facilitate overseas firms wishing to access the UK
market. Notably, the FS Bill legislates for a new Overseas Funds Regime
and the new framework for Gibraltar, both of which will provide a stable
and transparent basis for cross border activity in their respective
areas.
Our role on the global stage
Of course, the success of the UK regulatory framework does not only
depend on the rules we develop in the UK. Financial markets are global,
and interdependent. We have always been strong proponents of
high-quality international standards, and active members of standard
setting bodies such as FSB (Financial Stability Board), IOSCO (International Organization of Securities Commissions) and IAIS (International Association of Insurance Supervisors). We are committed to remaining at the forefront of developing and maintaining these standards.
International standards, and strong cooperation can enable cross-border activity.
This is hugely important. International standards, and strong
cooperation can enable cross-border activity without compromising on
regulatory outcomes, and ultimately reduce compliance costs for
businesses serving different markets – leading to a better and healthier
global financial system.
The events of this year, with the Covid-19 pandemic, have
demonstrated this. In March, central banks and market regulators around
the world, through multilateral fora and bilaterally, coordinated
responses to the financial challenges posed by Covid-19.
That cooperation facilitated parallel and complementary action across
jurisdictions to support the resilience of the financial system. As a
result, during the acute phase of the crisis, markets remained open, and
key business functions remained operational as governments introduced
local ‘lockdowns’.
Over the summer, authorities globally have been working together to
assess how that shock permeated through the financial system and where
vulnerabilities may lie. Looking ahead, the FSB and IOSCO are now
jointly considering the capacity of different non-bank financial
institutions to absorb and respond to stress.
We will consider what measures could be introduced to foster more
stable and predictable market-based finance. A resilient and sustainable
non-bank sector is vitally important to the recovery of the real
economy, both in fulfilling short-term financing needs and long-term
investment.
And as you can see from the Chancellor’s announcement this week, many
of our priorities are global in nature, whether it is climate change,
fin tech, or funds.
To take climate change as one example, good regulation has an
important role to play in the transition to a low carbon economy.
Building on the FSB’s Taskforce on Climate-related Financial Disclosures
(TCFD) recommendations, we are focused on improving transparency for
market participants and consumers; building trust in sustainable finance
products; and ensuring we provide the right regulatory tools support
firms.
From 1 January 2021, we are introducing rules requiring premium
listed companies to make better disclosures about how climate change
affects their business. We will also consult in the first half of 2021
on extending the scope of these rules and also on introducing TCFD
obligations for asset managers, life insurers and pension providers.
We look forward to working with the Government, the Bank of England,
as well as our international partners, in IOSCO and FSB, on these
important areas.
Future trade and market access
Turning to trade and market access in financial services.
The UK is one of the most open jurisdictions in the world for financial services trade, and we remain committed to openness.
The UK is one of the most open jurisdictions in the world for financial services trade, and we remain committed to openness.
This week, the Chancellor announced the launch of a Call for Evidence
on the UK’s overseas regime. This will help the Government better
understand how different components of the regime are and could be used,
to best facilitate a robust and open financial services sector.
We will work closely with HMT to ensure the UK’s overseas regime is
fit for the future, guided by our strong commitment to open global
financial markets underpinned by the highest standards of regulation and
supervisory oversight.
We are also supporting the Government with technical advice on new
trade and market access arrangements being developed with the EU and
with other jurisdictions, and we welcome Treasury’s proposal to deepen
partnerships with key financial partners across the globe.
We are already beginning to see fruits of this work.
The UK-Swiss joint intention to agree a future Mutual Recognition
Agreement speaks to the UK’s commitment to open markets rooted in
equivalent regulatory outcomes and strong regulatory and supervisory
cooperation.
In September, the UK also secured an economic partnership with Japan,
which includes new provisions that will facilitate appropriate
cross-border data transfers, improve clarity for firms seeking or
maintaining their authorisation, and paves the way for further dialogues
about market access and equivalence.
And the FCA continues to maintain and strengthen relationships with
key international counterparts, having recently participated in
regulatory dialogues with the US and Singapore and our economic and
financial dialogue with India.
As well as the benefits of trade and open markets, this work is an
important part of our broader efforts to build close and cooperative
relationships with our international partners, allowing us to address
issues which are critical to the future of globally connected financial
markets, and our wider economies.
Conclusion
In conclusion, looking ahead to the end of 2020, and beyond:
- we should all continue to prepare ahead of the UK’s exit from the transition period, and not be complacent;
- we will ensure that our regulatory approach to financial services
remains effective and appropriate now that we have left the EU; and
- we will build on our global role outside the EU, whilst
demonstrating our continued commitment to open markets, free trade, and
the highest international standards of regulation.
All of this will require our continued working with you and with our international partners – and we look forward to that.
FCA
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