On June 23, 2020, HM Treasury announced the first concrete "details on the UK's continued commitment to high regulatory standards for the financial services sector post-EU withdrawal", in respect of prudential and markets regulation.1

These policy announcements2 demonstrate the government's willingness to depart from some of the least industry-friendly EU rules and its desire to preserve the openness of the UK financial centre. However, it remains to be seen whether the UK Parliament will approve HM Treasury's key proposals to delegate the design and implementation of micro-prudential regulation to the expert, independent financial services regulators, and how the regulators will fulfil this role in practice and balance safety, soundness and consumer protection concerns, on the one hand, and considerations as to the competitive position of the UK's financial markets, on the other hand, in a post-financial crisis, post-pandemic ("COVID-19") and post-Brexit context.

The announcements also included HM Treasury's proposed solution for tackling the 'tough legacy' of contracts which reference the London Interbank Offered Rate ("LIBOR") and do not have robust reference rate fallbacks and which cannot be amended ahead of LIBOR discontinuation at the end of 2021. Implementation of regulatory reforms – HM Treasury's general approach

— The government intends to implement immediate reforms in line with the approach of the EU and other international authorities, where relevant. However, there will be some areas where it would deviate to account for the specificities of the relevant UK sector.

— In particular, HM Treasury is considering the implementation of aspects of EU regulations that do not apply until after the end of the Brexit transition period (i.e., December 31, 2020)3. It notes that "it is right that the UK exercises its discretion when implementing these files".

Financial Services Future Regulatory Framework Review

— In July 2019, HM Treasury launched its Financial Services Future Regulatory Framework Review to consider how the UK's regulatory framework needs to adapt over the coming years to be fit for the future.4 HM Treasury intends to use the review to explore the role of government and Parliament in deciding how public policy issues should be addressed in key areas of financial services regulation post-Brexit, and how the FCA and Bank of England can take the lead on designing and implementing specific regulations while ensuring there is appropriate democratic policy input.

— The next phase of the review will look at how financial services policy and regulation are made in the UK. HM Treasury will consult on its approach to the next phase of the review in the second half of this year.5


— The government continues to believe that comprehensive mutual equivalence is in the best interests of both the UK and EU.6

— HM Treasury intends to amend the onshored Markets in Financial Instruments Regulation ("MiFIR") to update the equivalence provisions for third country investment firms under Title VIII (Provision of services and performance of activities by third-country firms following an equivalence decision with or without a branch).7

Prudential requirements – general approach

— The government notes that "rules designed as a compromise for 28 countries cannot be expected in every respect to be the right approach for a large and complex international financial sector such as the UK".

— HM Treasury has identified four "overarching principles" in legislating prudential standards in the planned Financial Services Bill:8

  • financial stability and the implementation of international standards, in particular the Basel III and

3.1 standards;

  • supporting the government's wider objectives on growth, competition, and competitiveness;
  • a central role for the financial services regulators in designing and implementing the detailed and technical requirements that will apply to firms; and
  • a flexible and proportionate approach, enabling the UK to both maintain a strong future partnership with the EU and other major economies, and to account for specificities in the UK financial services market.9

— As a result, the vast majority of prudential requirements for banks and investment firms will be implemented in the regulators' rulebooks.10

— In exercising these rule-making powers, the regulators will be subject to an "enhanced accountability framework" that will:


1 See https://www.gov.uk/government/news/regulatory-reforms-in-financial-services?utm_source=e542de87-0eb8-42e5-b587 01edbbb84951&utm_medium=email&utm_campaign=govuk-notifications&utm_content=immediate .

2 These announcements are incorporated in a set of ministerial statements, a policy statement and a consultation document, in addition to related statements by the FCA.

3 Such regulations will therefore not be "onshored" under the European Union (Withdrawal) Act 2018.

4 See https://www.gov.uk/government/consultations/financial-services-future-regulatory-framework-review#history. clearygottlieb.com

5 The first phase of the review considered the issue of coordination between UK regulatory bodies with responsibility for financial services regulation, with the aim of improving the effectiveness of coordination in the future. The government published a call for evidence, which closed in October 2019. A summary of the responses to the call for evidence was published in March 2020.

6 The Political declaration setting out the framework for the future relationship between the European Union and the United Kingdom envisages that the key mechanism the UK and EU will use to regulate interactions between their financial systems will be their respective equivalence frameworks. It provides that "the Parties should start assessing equivalence with respect to each other under these frameworks as soon as possible after the United Kingdom's withdrawal from the Union, endeavouring to conclude these assessments before the end of June 2020". In our view, none of the areas of divergence from the EU framework announced by HM Treasury should, in principle, affect the EU's assessment of the equivalence of the UK's regulatory frameworks.

7 This is likely to carry across changes to the EU MiFIR Title VIII introduced by the Investment Firms Regulation ("IFR") with effect from June 26, 2021.

8 In the Queen's Speech on December 19, 2019, the government announced its intention to bring forward a Financial

Services Bill in order to (i) deliver the government's commitment for long-term market access between the UK and Gibraltar for financial services firms; (ii) simplify the process which allows overseas investment funds to be sold in the UK; and (iii) enable the UK to implement the Basel standards.

9 It seems not unlikely that these principles would also be made to apply in other areas of regulation.

10 Reflecting the position before the coming into effect of the Capital Requirements Regulation ("CRR").

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Originally published 26 June, 2020

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