HM Treasury, also sometimes known as HMT, published a guidance document on the equivalence framework of UK for financial services. The guidance explains how the UK intends to use equivalence framework as one of the key mechanisms to facilitate cross-border financial services transactions and market access. HM Treasury also announced that the UK will be granting a package of equivalence decisions to the European Economic Area states, including the member states of EU. These will come into effect following the end of the transition period. HM Treasury also published summary of the responses to the consultation on the main features of the Gibraltar Authorization Regime. This regime is a new permanent legislative framework enabling UK market access for Gibraltar-based financial services firms on the basis of the alignment of regulatory and supervisory frameworks and the cooperation between jurisdictions.
The European Union (Withdrawal) Act 2018 (EUWA) will convert the applicable EU legislation into UK law and this will take effect from the end of the transition period, on December 31, 2020. This conversion of EU legislation includes nearly 40 equivalence and exemption provisions. Under the EUWA, UK has also passed the Equivalence Determinations for Financial Services and Miscellaneous Provisions (Amendment etc) (EU Exit) Regulations 2019, which allows the UK to make equivalence directions for the European Economic Area during the transition period. HM Treasury is undertaking new assessments for overseas jurisdictions while BoE will make decisions to recognize individual central counterparties (CCPs) within a jurisdiction deemed to be equivalent. All overseas CCPs for which a recognition decision has not been made by the end of the transition period will be able to continue providing services in UK, and to firms, by using the Temporary Recognition Regime of UK for non-UK CCPs.
The UK government confirmed that it is not ruling out further equivalence decisions for the European Economic Area states in the future, as it continues to believe that comprehensive mutual findings of equivalence between UK and European Economic Area states are in the best interests of both parties; however, UK awaits clarity from the EU about its intentions. HM Treasury, after considering the advice received from BoE, PRA, and FCA, has conducted equivalence assessments on the European Economic Area states. For the decisions below, both the legally binding requirements and the effectiveness of the regulation and supervision of adherence to these requirements have been deemed equivalent on an outcomes basis:
- The Capital Requirements Regulation (CRR) Equivalence Directions 2020 will grant equivalence to the European Economic Area for certain Articles of CRR, which will form a part of the UK law at the end of the transition period. This direction covers seven equivalence decisions. For UK firms, these equivalence decisions will ensure they will not be subject to increased capital requirements as a result of their European Economic Area state exposures.
- The Solvency II Regulation Equivalence Directions 2020 will grant equivalence to the European Economic Area for the purposes of Articles 378, 379, and 380 of the Solvency II Regulation. This direction addresses all three equivalence decisions, covering both reinsurance and group capital treatment.
- The Benchmarks Regulation Equivalence Directions 2020 will determine that benchmark administrators in each European Economic Area state comply with legal requirements that are equivalent to the Benchmarks Regulation, which will apply in UK law at the end of the transition period and are appropriately supervised in the relevant European Economic Area member state. This equivalence decision acts as a mechanism to enable such administrators to be added to the benchmarks register of FCA and to enable them to provide benchmarks to the supervised entities in UK. The UK government intends to extend the transitional period for all overseas benchmarks from the end of 2022 to the end of 2025 in the Financial Services Bill, which has recently been introduced in Parliament. During the transitional period for third-country benchmarks, UK-supervised entities are permitted to use all third country benchmarks.
- The Credit Rating Agencies Regulation Equivalence Directions 2020 will determine that, for the purposes of Article 5 of the Credit Rating Agencies Regulation, the European Economic Area states are equivalent. This means non-systemic credit rating agencies authorized or registered in the European Economic Area states will be able apply to be certified in UK, subject to certain regulatory requirements. Endorsement also allows for the cross-border use of ratings between UK and EU. One condition for endorsement is that the EU regulatory and supervisory framework is deemed to be as stringent as UK framework. FCA had concluded a positive endorsement assessment in March 2019.
- BoE Notification
- Guidance on Equivalence Framework
- Equivalence Decisions
- FCA Statement
- Responses to Consultation
Keywords: Europe, UK, Banking, Insurance, Securities, CRR, Solvency II, Benchmarks Regulation, CRA, Brexit Transition, Equivalence Regime, Basel, BoE, PRA, FCA, HM Treasury
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