Opinion of the European Banking Authority on issue related to the departure of the United Kingdom from the European Union
24 October 2017
Regulatory News Alert
The opinion from the EBA (European Banking Authority) largely replicates and reflects the positions held by ESMA in its papers from July 2017 and earlier from May. One of the core focuses of the paper is the substance in EU-relocated or expanded entities. These entities should be able to abide by their legal responsibilities. New applications or extensions of the current activities should be treated as outright new applications, meaning that the Competent Authority could not rely on the fact that the institution seeking approval has been fully compliant in its current location.
The scope of the EBA’s opinion focuses on the prudential aspects of financial regulations and firms, ensuring that there is an appropriate level of capital to sustain the activities. EBA draws a clear line between before and after Brexit. Notably, EBA makes it clear that post-Brexit, UK firms looking for relocation will have to comply with third country rules, unless there is an agreement to proceed otherwise.
Among other elements to highlight are the need to ensure that:
- Entities, if they expand their licence, have the appropriate resources and means, in both staff and other means, notably to ensure that outsourcing does not create empty or powerless shells;
- Entities that relocate should do so prior to March 2019 along the EU regulatory requirements applicable to firms relocating from one member state to another. After March 2019 UK firms might be third countries firms, implying a need to respect in their jurisdiction equivalent rules, anti-money laundering, anti-tax avoidance… rules;
- In any case, the expanded or new entities may have to participate in a DGS (deposit guarantee scheme) even for branches post March 2019.
EBA also stresses the need to ensure that resolution authorities will have to explore options for engagement with the UK central counterparty (CCP) in the perspective of resolution if these remain in the UK.
EBA explicitly states that firms (any investment firm, credit institution, clearing house, electronic payment firm) must ensure they respect the following (non-exhaustive):
- Institutions engaging in back-to-back or intragroup operations to transfer risk to another entity should have adequate resources to identify and fully manage their counterparty credit risk, and any material risks that they have transferred in the event of the failure of their counterparty;
- EU27 authorities should have regard to the likelihood that after Brexit the UK will be a third country and thus activities outsourced to institutions in the UK prior to Brexit should be assessed with regard to the ability of the institution to adapt to this possible scenario;
- Institutions and authorities need to assess their stock and issuance plans for instruments used to meet the minimum requirement for own funds and eligible liabilities (MREL) in the light of Brexit, and in particular their reliance on instruments issued under English law.
One last note—the EBA opinion, similarly to the former ESMA opinions, is not a legally binding regulation.
How Deloitte can help:
The different teams of Deloitte can help you assess and respond to the potential impacts of such changes on your organization, clients, and suppliers. The RegWatch team in particular will help you navigate the evolution of regulations.