Shearman And Sterling

London, Brexit

July 03, 2018

Smoothing the Path for Financial Institutions on Brexit


Jump to...


The U.K.’s HM Treasury has set out its approach to the grandfathering of EU27 businesses on Brexit and to how existing EU financial services directives and regulations are to be adopted into U.K. law at the moment of Brexit (“onshoring”)[1]. It has taken this step following the enactment of the European Union (Withdrawal) Act 2018[2]. The U.K.’s financial regulators, the Bank of England[3], which includes the Prudential Regulation Authority, the Financial Conduct Authority[4] and the Payment Systems Regulator[5], have also issued statements on their respective approaches to grandfathering and onshoring.

The Likely Transitional Period

The U.K. and the EU have, in principle, agreed the terms of a transitional, or implementation, period to run from exit day (March 29, 2019) to December 31, 2020. During that “implementation” period, the U.K. would remain a member of the EU’s single market in financial services. Passporting and other relevant EU frameworks would remain available, allowing U.K. and EU27 firms, funds and trading venues to continue to provide services cross-border or through branches across the U.K. and EU27. U.K. financial market infrastructures, such as CCPs, can continue to provide services in the EEA and EEA and “third-country” (non-EEA) financial market infrastructures can continue to provide services in the U.K. Where existing EU legislation is undergoing reform, or new legislation is expected to be introduced, U.K. firms will need to continue their implementation plans to comply with any new EU legislation that comes into effect during that time.

Adoption of Existing Pan-EU Law in UK

The European Union (Withdrawal) Act 2018 (the EUWA) converts EU law as it stands at the moment of exit into domestic law before the U.K. leaves the EU. This is referred to as “onshoring.” The U.K. can change or remove any of these laws after Brexit but at the moment of Brexit all will be adopted more or less verbatim. The EUWA empowers ministers to make statutory instruments (SIs) to prevent, remedy or mitigate any failure of EU law to operate effectively or any other “deficiency” in retained EU law. The SIs will not themselves make any policy changes and the power to create them will fall away two years after exit day. HM Treasury has conducted a thorough review to identify deficiencies that will require SIs to be laid under the EUWA. Examples of deficiencies include provisions in retained EU law that would become redundant, such as references to the relationship between EU and member state supervisory bodies, and provisions that refer to functions carried out by EU authorities that would no longer apply on the U.K.’s exit.

The Manner of Onshoring of EU “Level 2” Requirements

HM Treasury intends to delegate powers to the relevant U.K. regulators to address deficiencies in the U.K. regulatory rulebooks and to task the regulators with making any necessary amendments to, and subsequently maintaining, the Regulatory Technical Standards and Implementing Technical Standards, which comprise “level 2” of the EU legislation that will be onshored. These RTS and ITS sit under the “level 1” EU legislation and do not set any policy direction. Instead they provide technical detail on how the level 1 requirements must be met. HM Treasury issued draft legislation in April 2018: the Financial Regulators’ Powers (Technical Standards) (Amendment etc.) (EU Exit) Regulations 2018[6]. Amongst other things, the draft legislation provides for HM Treasury approval to be obtained for proposed changes to RTS/ITS and for the regulators to produce an annual report to HM Treasury showing how they have exercised their delegated powers under the EUWA.

On Brexit, U.K. bodies will also need to take over functions that are carried out by EU bodies. HM Treasury is allocating those functions as part of its onshoring work. HM Treasury intends that the FCA will be empowered to regulate credit rating agencies and trade repositories, a function currently carried out by the European Securities and Markets Authority. The Bank of England will take over ESMA’s current functions and powers in relation to non-U.K. CCPs and non-U.K. Central Securities Depositaries. A division of powers between U.K. regulators has already been proposed in the Financial Regulators’ Powers (Technical Standards) (Amendment etc.) (EU Exit) Regulations 2018.

Continuity and Certainty in the Event of No Deal

The statement issued by HM Treasury states that firms should continue to plan for Brexit on the assumption that an implementation period will be in place from March 29, 2019. However, given that the agreed terms of the implementation period will not be binding unless and until there is finalization of a Withdrawal Agreement between the EU and the U.K., HM Treasury must also plan for a “no deal” scenario, whereby the U.K. becomes a “third country” on exit day. HM Treasury’s approach to drafting the necessary onshoring legislation is to ensure continuity and certainty, and to protect financial stability, by readying the U.K. framework for a no deal scenario, with legislation that can take effect either on exit day or at a later date if the U.K. enters the implementation period.

Temporary Permission: Avoiding a Cliff Edge for EEA Firms Operating in the UK

The U.K. plans to introduce a Temporary Permissions Regime (TPR). Announced in December 2017[7], the proposed TPR will allow EEA firms that would lose their passporting rights on a “no deal” Brexit to continue to operate in the U.K. for a time-limited period, which would provide them with time to seek U.K. authorization (or, where applicable, recognition) to conduct regulated activities in the U.K.


HM Treasury and the regulators have outlined their plans for consultation as follows:

Summer 2018

• HM Treasury will issue a number of SIs relating to the TPR, the TPR for CCPs and to the delegated powers for the regulators on the RTS/ITS and rulebook amendments.

• HM Treasury will publish the first set of draft SIs to correct deficiencies in retained EU law will, dealing with prudential regulation and capital markets issues.

Autumn 2018

• The FCA will issue a consultation paper on how it plans to amend its Handbook and the RTS/ITS for which it has responsibility.

• The Bank of England expects to consult on the RTS/ITS for which it has responsibility.

• The Payment Systems Regulator is expected to consult on RTS/ITS under the Interchange Fees Regulation ((EU) 2015/751).

Autumn 2018 – early 2019

• HM Treasury will issue further groups of SIs to correct deficiencies in retained EU law.

• The FCA will consult on rules that will apply to EEA firms in the TPR.

• The FCA intends to publish information for EU entities that currently access or do business in the U.K. without using passporting rights.



[1] HM Treasury’s Approach to Financial Services Legislation under the EU (Withdrawal) Act 2018, available at

[2] 2018 c. 16, available at

[3] Bank of England Press Release issued June 27, 2018. 

[4] FCA Statement issued June 27, 2018, available at

[5] PSR Press Release issued June 27, 2018, available at

[6] Financial Regulators’ Powers (Technical Standards) (Amendment etc.) (EU Exit) Regulations 2018, available at and see accompanying explanatory note at

[7] Written statement HCWS382, Mr Philip Hammond (The Chancellor of the Exchequer), December 2017, available at

Authors and Contributors

Thomas Donegan


Financial Institutions Advisory & Financial Regulatory

+44 20 7655 5566

+44 20 7655 5566


Barnabas Reynolds


Financial Institutions Advisory & Financial Regulatory

+44 20 7655 5528

+44 20 7655 5528


Sandy Collins

Professional Support Lawyer

Financial Institutions Advisory & Financial Regulatory

+44 20 7655 5601

+44 20 7655 5601