Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019

Many of the definitions for regulated activities in FiSMA, and in the 2001 regulated activities order made under it, include the EEA in their scope and rely on definitions in EU law to operate. To reflect the UK’s new position outside the EU, the SI will amend the territorial scope of these definitions where needed so that they only apply to the UK after exit. Some of the changes proposed in this SI are also needed so that UK regulators can continue to carry out their existing statutory functions. As mentioned already, this SI will complete the process of removing passporting-related provisions. This will mean that some firms and fund managers will face new requirements as a result of these necessary changes. The SI therefore creates some transitional arrangements to mitigate disruption to those EEA firms and their consumers. For example, some of the transitional provisions relate to certain financial instruments, financial documents, or contracts which have been issued or entered into pre-exit, ensuring that they continue to operate effectively after exit for an appropriate period.

I will use the rest of my opening remarks to focus on the temporary transitional power in Part 7 of this SI—a very significant part of the no-deal preparations—to which some of your Lordships are paying particularly close attention. This power is a significant delegation of responsibility to the UK regulators so it is quite right that noble Lords have been scrutinising this power in detail. The Economic Secretary and I are very grateful for the constructive meeting which we had with the noble Lords, Lord Tunnicliffe and Lord Sharkey, and the noble Baroness, Lady Kramer, last week to discuss the temporary transitional power. My opening speech will be longer than normal as a result of that meeting, at which they invited me to put on record some remarks to make the nature of those transitional arrangements clear.

Despite the specific transitional arrangements which we are putting in place through a number of SIs, firms will still be faced with a large volume of regulatory changes to which they will need to adapt in a no-deal scenario. This could cause significant disruption to the financial services sector, and consumers, immediately after exit. To prepare for this scenario, this SI creates a temporary transitional power, which allows the UK regulators to defer or modify changed requirements for firms. While I acknowledge that this is a broad power to delegate to UK regulators, in a no-deal scenario the regulators will need flexibility to ensure that firms can reach compliance with onshoring regulatory changes in an orderly way and to respond to unforeseen pressures on firms. Given their supervisory responsibility for firms, the regulators, using their supervisory judgement, are best placed to decide how to phase in onshoring regulatory changes.

This is not intended to be a crisis intervention power to deal with failing firms or financial instability. UK regulators already have a comprehensive range of crisis intervention tools available. Rather, the power is intended to give the regulators flexibility to smooth the regulatory adaptation challenge for firms, to prevent instability and disruption from arising in the first place. While the power is broad in terms of the regulatory requirements it can apply to, the purpose for which it can be used is very specific. It can be used only to prevent or mitigate disruption that may reasonably be expected to arise for firms as a result of legislative changes made under the EU withdrawal Act. Also, the regulators can use the power only to delay or modify financial services requirements which they are responsible for supervising. Onshoring changes on accounting standards, for instance, are not the responsibility of financial services regulators and would be out of scope of this power.

Given that firms have been preparing on the basis that there will be a withdrawal agreement, this temporary power is designed to replace the adjustment time that firms would have if the implementation period in the proposed withdrawal agreement were ratified. For this reason, the temporary transitional power is available for two years from exit day. The power, and any directions made under it, would therefore automatically expire at the end of this two-year period, after which firms would have to comply with all new requirements set by Parliament in legislation. If, for any reason, the Treasury subsequently took the view that more time was needed for firms to adapt, we would need to return to Parliament with new legislation. This SI does not provide for any extension of the transitional power.