Brexit for Financial Services
Post-Brexit UK Secondary Legislation Published for Temporary Permissions Regime for Payments Services
On September 5, 2018, HM Treasury published draft statutory instruments on the regulation of payments and e-money and on access to the Single Euro Payments Area in preparation for the U.K.'s withdrawal from the EU – the draft Electronic Money, Payment Services and Payment Systems (Amendment and Transitional Provisions) (EU Exit) Regulations 2018 and the Credit Transfers and Direct Debits in Euro (Amendment) (EU Exit) Regulations 2018. The draft Regulations are relevant to all Payment Service Providers and registered Account Information Service Providers. The draft Regulations will amend the Payment Services Regulations 2017, Electronic Money Regulations 2011 and the SEPA Regulation to:
- Create a temporary permissions regime
for EEA payment firms
In line with the proposed temporary permissions regime for EEA firms regulated under the Financial Services and Markets Act 2000 (covered by the draft EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018), HM Treasury is proposing a TPR for payments. EEA firms operating under the TPR for payments will need to establish a U.K. subsidiary at the end of the proposed three-year TPR period. This provision should give firms the time to fully operationalize their new U.K. subsidiary. - Ensure access to segregated
safeguarding accounts
The EU Payment Services Regulations require payment institutions and e-money firms to safeguard consumer funds in the event of an insolvency. One method for doing so is to hold the funds in a segregated account with a EU bank so that if the payment institution or e- money firm goes into insolvency, the customers' funds will be paid out in priority to other creditors. HM Treasury is proposing to allow, subject to certain conditions being met, these firms to hold such safeguarding accounts at banks incorporated anywhere in the world. - Maximize the prospect of the U.K.
maintaining access to SEPA
This will be achieved by retaining the same operative provisions as are applicable under the EU SEPA Regulation and making certain changes to account for the U.K. accessing SEPA as a third country instead of as an EU Member State. In addition, the EU PSR will be amended so that relevant sections will continue to apply in full to transactions in Euro within SEPA, including intra-U.K.-EU transactions. Should the U.K. not be able to continue its participation in SEPA, it is proposed that HM Treasury is granted a power to remove the SEPA Regulation from U.K. laws and to apply the PSR requirements only to the part of a Euro transaction that is carried out in the U.K.
HM Treasury is proposing not to retain the EU Cross-Border Payments Regulation on the basis that cross- border transactions will not be regulated under U.K. regulation and compliance with the requirements is unnecessary for third-country membership of SEPA. The U.K. government will assess whether this approach needs to be adopted once the proposed changes to the Cross-Border Payments Regulation have been finalized. HM Treasury has confirmed that draft regulations onshoring the Interchange Fee Regulation will be issued at a later date.
HM Treasury intends to lay the draft Regulations before Parliament in the autumn. The Financial Conduct Authority is expected to consult in the autumn on changes to its Handbook as a result of the draft Regulations and to reflect the relevant EU Technical Standards. The draft Regulations will not take effect on
March 29, 2019 (Exit Day) if the EU and the U.K. agree an implementation period. The draft Regulations and the explanatory guidance are available at:
https://www.gov.uk/government/publications/eu-exit-sis-for-payment-services-e-money-and-the-sepa-regulation and details of the TPR for FSMA firms are available at: https://finreg.shearman.com/uk-secondary-legislation-published-for-post-brexi.
Derivatives
EU Disagreement on EU Technical Standards for Reporting of Securities Financing Transactions
On September 5, 2018, the European Securities and Markets Authority published an Opinion on the European Commission's proposed amendments to the final draft Implementing and Regulatory Technical Standards on reporting under the Securities Financing Transactions Regulation. Various parts of the SFTR came into effect on January 12, 2016. However, the new reporting obligation for SFTs is not yet in force. Securities financing transactions involve the use of securities to borrow cash or other higher investment-grade securities, or vice versa. Such transactions can include repurchase transactions, securities lending and sell/buy backs. The SFTR requires, amongst other things, all securities financing transactions to be reported to EU recognized trade repositories, including details on the composition of collateral, whether collateral is available for reuse or has been reused, the substitution of collateral and any haircuts applied. The reporting obligation will apply to financial and non-financial counterparties, subject to exceptions for central banks and similar bodies.
On March 30, 2017, ESMA submitted its final draft RTS and ITS on the reporting obligation for the SFTR to the European Commission for endorsement. The final draft technical standards included provisions mandating the use of future industry standards on legal entity identifiers for branches and unique trade identifiers for transactions for reporting to trade repositories once the standards had been endorsed by ESMA. The provisions followed the approach to capturing expected forthcoming developments under the European Market Infrastructure Regulation.
On July 24, 2018, the Commission informed ESMA by letter that it intended to endorse the draft RTS and ITS with amendments. The Commission proposes to remove from the technical standards the references to "endorsements by ESMA" of potentially forthcoming industry standards. The proposed amendments would ensure that any changes to the SFTR reporting obligation as a result of industry standards would need to be made through the full EU legislative process instead of ESMA "endorsing" such standards. In addition, the Commission has also requested ESMA to submit proposed amendments to the ITS on the reporting requirements under EMIR to align the procedure for incorporating future industry standards with the Commission's approach under the SFTR.
ESMA's Opinion states that the Authority does not agree with the Commission's proposed amendments to the SFTR reporting technical standards. ESMA's view is that the Commission's proposed amendments would: (i) prevent ESMA from taking into account international developments and reporting standards agreed at global level; (ii) create the risk that the EU reporting requirements would not be implemented in parallel with international reporting standards; and (iii) not provide legal certainty or predictability. ESMA also notes that the EMIR reporting standards have already been agreed upon by the Commission, the European Parliament and the Council of the European Union. On that basis, ESMA requests the Commission to adopt the SFTR reporting technical standards in the original form in which they were submitted by ESMA in March 2017.
The ESMA's Opinion and the Commission's letter are available at: https://www.esma.europa.eu/press-news/esma-news/esma-publishes-opinion-proposed-amendments-sftr-technical-standards and the final draft technical standards submitted by ESMA are available at: https://finreg.shearman.comean-sees-and-markets-authority-publish.
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