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FCA sets out expectations for firms ahead of Brexit


The UK’s Financial Conduct Authority has issued guidance for the firms and individuals it regulates ahead of Brexit, clarifying the areas where preparation is needed to meet new regulatory obligations.

In this situation the authority said it intended to use the power that would be granted to it in the currently draft legislation published by the Treasury to ensure that firms and other entities did not "generally" need to prepare now to meet changes to their obligations connected to Brexit.

The temporary transitional power would give the FCA the ability to delay or to phase in changes to regulatory requirements for a period of two years from exit day, currently scheduled for 29 March 2019.

Despite this, the FCA said there were a number of areas where firms did need to begin preparations for the UK's withdrawal from the EU, as it would not be consistent with its statutory objectives to grant transitional relief.

These areas include changes to the UK’s transaction reporting regime under the Markets in Financial Instruments Directive (MiFID II). This also affects European Economic Area (EEA) firms which operate in the UK through the temporary permissions regime which would take effect if the UK leaves the EU without an implementation period in place and the passporting regime ceases.

Also from exit day, all firms and central counterparties who enter into derivatives transactions that fall within the scope of the European Market Infrastructure Regulation (EMIR) will have to report into a UK-registered trade repository.

EEA entities that have securities admitted to trading or traded on UK markets will be required to submit information to the FCA and disclose certain information to the market, from the day of the UK's withdrawal from the EU.

Any firm which wants to carry on using the exemption for market-making activities under the EU's Short Selling Regulation is to be required to join a UK trading venue and notify the FCA of its intention to use the market maker exemption 30 days ahead of their intended use.

Users of credit ratings must also prepare ahead of exit day, as from that time all ratings will need to be issued or endorsed by a credit ratings agency established in the UK and registered with the FCA for them to be eligible for regulatory use. However ratings issued or endorsed in the EU before exit by an agency with an affiliate registered or currently applying for registration with the FCA may be used for regulatory purposes in the UK for up to one year after exit.

Finally, UK originators or sponsors will have to send notifications to the FCA from exit day for any UK securitisations which they wish to be considered simple, transparent, and standardised under the  Securitisation Regulation. According to the regulator, UK originators, sponsors or securitisation special purpose entities which use a third-party verifier (TPV) to assess compliance with the criteria will only be able to use a TPV established in the UK and authorised by the FCA.

The FCA said it expected firms and other regulated entities to undertake "reasonable steps" to comply with changes by exit day.

"We are conscious of the scale, complexity, and magnitude of some of these changes and consequently intend to act proportionately," the regulatory statement said.

"This means that, in the event that the UK leaves the EU without an implementation period, we will not take a strict liability approach and do not intend to take enforcement action against firms and other regulated entities for not meeting all requirements straight away, where there is evidence they have taken reasonable steps to prepare to meet the new obligations by exit day," the FCA said.

FCA executive director of international Nausicaa Delfas said: "The temporary transitional power is an important part of our contingency planning. In the event that the UK leaves the EU without an agreement, it gives us the flexibility to allow firms and other regulated persons to phase in the regulatory changes that would need to be made as a result of 'onshored' EU legislation. This will give firms certainty, ensure continuity, and reduce the risk of disruption.

"There are some areas such as reporting rules under MiFID II, where it would not be appropriate to provide a phase-in, as receiving these reports is crucial to our ability to ensure market oversight and the integrity of financial markets.  In these areas only, we expect firms and other regulated persons to begin preparing to comply with the changes now," Delfas said. 

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