Background
Under the terms of the EU (Withdrawal Agreement) Act 2020 (the ‘Withdrawal Agreement Act’), the UK is required to transpose parts of both the Capital Requirements Directive (CRD) V and the Banking Resolution and Recovery Directive (BRRD) II by Monday 28 December 2020.
In order to implement the relevant parts of these Directives, on Thursday 15 October 2020 HM Treasury laid before Parliament two Statutory Instruments (SIs):
- The Financial Holding Companies (Approval etc.) and Capital Requirements (Capital Buffers and Macro-prudential Measures) (Amendment) (EU Exit) Regulations 2020, and
- The Bank Recovery and Resolution (Amendment) (EU Exit) Regulations 2020.
These Instruments are being made using HM Treasury’s powers under:
- section 2(2) of the European Communities Act 1972, as saved by section 1 of the Withdrawal Agreement Act, to amend primary and secondary legislation in order to transpose CRD V and BRRD II, and
- section 8 of the European Union (Withdrawal) Act 2018 (the ‘Withdrawal Act’) to correct deficiencies in domestic legislation that relates to EU membership to ensure that it continues to function effectively after the end of the transition period. These changes are referred to as ‘onshoring amendments’.
In order to implement CRD V and BRRD II, to date the Prudential Regulation Authority has additionally published three consultation papers (CPs) on its proposed changes to PRA rules:
- CP12/20 ‘Capital Requirements Directive V (CRD V)’ on Friday 31 July 2020,
- CP17/20 ‘Capital Requirements Directive V (CRD V): Further implementation’ on Tuesday 20 October 2020; and
- CP18/20 ‘Bank Recovery and Resolution Directive II’ on Wednesday 28 October 2020.
Where relevant, in some cases these consultations included a draft EU Exit Rulebook Instrument, containing the PRA’s proposed onshoring amendments to ensure that the related PRA rules continue to function effectively after the end of the transition period.
The temporary transitional power
The temporary transitional power (TTP) enables the UK’s financial services regulators to delay the application of, or otherwise modify, firms’ regulatory obligations where they have changed as a result of an onshoring amendment made under section 8 of the Withdrawal Act.
The TTP can only be applied to ‘relevant obligations’. An obligation is ‘relevant’ if the regulator exercising the power is responsible for supervising, or has other functions relating to, a firm’s compliance with it.
HM Treasury has confirmed that it is their intention to retain the TTP, and update its application so that it is available for use by the regulators for a maximum period of two years from the end of the transition period.
The Bank and PRA intend to use the TTP as previously communicated in relation to ‘exit day’, that is to provide broad transitional relief, with key exceptions, for 15 months after the end of the transition period, until Thursday 31 March 2022. The Bank’s and PRA’s broad application of the TTP means that transitional relief will apply to all relevant onshoring amendments, and any desired exceptions have to be expressly provided for in the Bank’s and PRA’s transitional directions.
The Bank and PRA last published draft transitional directions in CP13/20 ‘UK withdrawal from the EU: Changes before the end of the transition period’ on Tuesday 22 September 2020.
This CP stated that further changes to the final transitional directions may be required, depending on the need for further specific exceptions from the TTP for onshoring amendments to CRD V and BRRD II derived legislation.
The application of the TTP to CRD V and BRRD II derived legislation
The Bank and PRA have not identified any further exceptions to its transitional directions necessary as a result of onshoring amendments to CRD V and BRRD II derived legislation. This means that transitional relief will apply to the small number of ‘relevant obligations’ which are changed by onshoring amendments made to CRD V and BRRD II derived legislation at the end of the transition period.
The TTP, however, cannot apply to changes being made to primary or secondary legislation to implement a Directive in domestic law. These changes are not onshoring amendments made under section 8 of the Withdrawal Act to which the TTP can apply. Firms must therefore ensure that they are ready to comply with changes to domestic law, and PRA rules, which are being made to implement CRD V and BRRD II to the extent that these are relevant to firms.
In relation to BRRD II, HM Treasury is making changes to primary legislation that will affect the existing PRA regime for Contractual Recognition of Bail-in (CROB) and Stays. Most of the elements of the Statutory Instrument which are relevant to CROB and Stays will come into force on Monday 28 December 2020 but will subsequently cease to have effect from the end of the transition period. This process is referred to as ‘sunsetting’. As a result of this process the TTP will be of limited relevance to BRRD II.
To support the sunsetting process, the PRA is consulting in CP18/20 on changes to the CROB Part and Stays Part of the PRA Rulebook.
The PRA has previously communicated that it does not intend to grant transitional relief in respect of CROB rules and Stays rules, except in relation to phase two liabilities as referenced in relation to CROB. The PRA intends that this policy outcome will remain the same irrespective of any changes to PRA rules made due to BRRD II.
The PRA may need to reconsider its approach should changes be made to the final rules following responses to the CRD V and BRRD II CPs.