HE CAPITAL REQUIREMENTS REGULATION (AMENDMENT) (EU EXIT) REGULATIONS 2021
2021 No. [XXXX]
1. Introduction
1.1 This explanatory memorandum has been prepared by Her Majesty’s Treasury and is
laid before Parliament by Act.
1.2 This memorandum contains information for the Joint Committee on Statutory
Instruments and the Sifting Committees.
2. Purpose of the instrument
2.1 The Regulations are being made to address failures of retained EU law in the Capital
Requirements Regulation (Regulation (EU) 575/2013 of the European Parliament and
of the Council of 26 June 2013) (‘the CRR’) to operate effectively and other
deficiencies arising from the withdrawal of the United Kingdom from the European
Union. In particular, these Regulations address the deficiencies under paragraphs (a)
and (g) of section 8(2) of that Act. These Regulations will ensure that the CRR
continues to operate effectively now that the UK has the left the EU and before the
UK’s Investment Firms Prudential Regime (IFPR) is introduced.
Explanations
What did any relevant EU law do before exit day?
2.2 The CRR makes provision, through Articles 493 and 498, to exempt investment firms
whose main and exclusive business is the provision of investment services or
activities in relation to commodity derivatives (i.e. commodities dealers) from specific
prudential requirements.
2.3 The exemptions in Article 493 and 498 CRR, to own funds requirements and large
exposure limits, relieve commodities dealers of three notable obligations: first, to hold
regulatory capital equal to at least 8% of total risk exposures; second, to calculate and
report exposures to any individual counterparty equal to or greater than 10% of a
firm’s eligible capital; and third, a prohibition from incurring exposures of more than
25% of eligible capital or EUR 150 million, whichever is higher, to a counterparty or
group of counterparties.
Why is it being changed?
2.4 These provisions were amended by the EU by way of a corrigendum to the EU’s
Investment Firm Regulation (the EU’s ‘IFR’; Regulation (EU) 2019/2033 of the
European Parliament and of the Council of 27 November 2019 on the prudential
requirements of investment firms) on 2 December 20201
, to align with the planned
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Corrigendum to Regulation (EU) 2019/2033 of the European Parliament and of the Council of 27 November
2019 on the prudential requirements of investment firms and amending Regulations (EU) No 1093/2010, (EU)
No 575/2013, (EU) No 600/2014 and (EU) No 806/2014 (OJ 2.12.2020, L 405/79)
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introduction of the EU’s new regime for Investment Firms on 26 June 2021. The
changes form part of retained EU law, but do not now operate effectively in the UK.
2.5 Following the recent corrigendum, the CRR now makes provision for these
exemptions to apply until 26 June 2021. This is the date when the EU’s IFR will
apply, and it ensures that EU commodities dealers are not required to comply with the
provisions of the CRR in the above paragraph before the IFR applies to them. But the
UK’s equivalent regime for investment firms and commodities dealers – the IFPR –
will not be introduced until 1 January 2022. Both the EU’s IFR and the UK’s IFPR
introduce a more proportionate capital requirements regime for some investment firms
including commodities dealers and is less onerous than the CRR. Without
amendment, Articles 493 and 498 of the CRR will require UK commodities dealers to
comply with the prudential requirements of the CRR set out above between 26 June
and 31 December 2021. They would then need to comply with a different prudential
regime, the IFPR, from 1 January 2022. Such a development would amount to a
significant regulatory burden for these firms.
2.6 HMT therefore considers that retained EU law does not operate effectively in the UK
in this instance, and it is therefore appropriate to extend the expiry date for CRR
exemptions for UK commodities dealers to dovetail with the introduction of the UK’s
IFPR regime.
What will it now do?
2.7 These Regulations amend retained EU law and regulations made under section 8
European Union (Withdrawal) Act 2018, and they will ensure that the CRR continues
to operate effectively now that the UK has the left the EU and before the UK’s
Investment Firms Prudential Regime (IFPR) is introduced.
3. Matters of special interest to Parliament
Matters of special interest to the Sifting Committees
3.1 The instrument is being laid for sifting by the Sifting Committees under the European
Union (Withdrawal) Act 2018.
Matters relevant to Standing Orders Nos. 83P and 83T of the Standing Orders of the House
of Commons relating to Public Business (English Votes for English Laws)
3.2 As the instrument is subject to negative resolution procedure there are no matters
relevant to Standing Orders Nos. 83P and 83T of the Standing Orders of the House of
Commons relating to Public Business at this stage.
4. Extent and Territorial Application
4.1 The territorial extent of this instrument is to the whole United Kingdom.
4.2 The territorial application of this instrument is to the whole United Kingdom.
6. Legislative Context
6.1 Prior to the planned introduction date of the EU’s IFR on 26 June 2021, the CRR
remains a core part of the EU’s prudential regulation regime for banks, building
societies and investment firms. The EU’s prudential policy regime consists of the
CRR (Regulation 2013/575/EU) and the Capital Requirements Directive IV
(Directive 2013/36/EU), together with a range of Binding Technical Standards. These
were amended by CRR II (Regulation 2019/876/EU) and Capital Requirements
Directive V (Directive 2019/878/EU).
6.2 The CRR directly applied in the UK as a Member State from 2013 while the CRDIV
and CRDV were implemented by UK legislation, predominantly through the Capital
Requirements (Country-by-Country Reporting) Regulations 2013 (SI 2013/3118), the
Capital Requirements (Capital Buffers and, Macro-prudential Measures) Regulations
2014 (SI 2014/894), the Capital Requirements Regulations 2013 (SI 2013/3115), and
the Financial Holding Companies (Approval etc.), and Capital Requirements (Capital
Buffers and Macro-prudential Measures) (Amendment) (EU Exit) Regulations 2020
(SI 2020/1406), and regulator rules.
6.3 A number of instruments amending the CRR have been made using section 8(1) of the
European Union (Withdrawal) Act 2018 to correct deficiencies as a result of the
withdrawal of the UK from the EU. These include the Capital Requirements
(Amendment) (EU Exit) Regulations 2018 (SI 2018/1401) and Capital Requirements
(Amendment) (EU Exit) Regulations 2019 (SI 2019/1232).
6.4 This instrument uses section 8(1) of European Union (Withdrawal) Act 2018 to
revoke previous EU Exit amendments to Articles 493 and 498 in SI 2018/1401,
referenced above. Those amendments are no longer appropriate, as a result of the
latest amendments made to those Articles by way of EU Corrigendum of 2 December
2020, which were made before Implementation Period Completion Day (IPCD).
Specifically, this instrument also uses section 8(1) powers of the European Union
(Withdrawal) Act 2018 to make new amendments to those Articles to ensure they
operate effectively in the UK context.
6.5 The Financial Conduct Authority (FCA) will use its existing rule-making powers
under the Financial Services and Markets Act 2000 to implement the IFPR,
supplemented by further legislation, currently being considered by Parliament, which
removes investment firms prudentially regulated by the FCA from the scope of the
CRR, obligates the FCA to have regard to specific considerations as part of its rulemaking for investment firms, and which extends their rule-making powers to the
holding companies of investment firms. The IFPR will apply to investment firms
prudentially regulated by the FCA and their holding companies. The FCA and the
Prudential Regulation Authority announced on 16 November 2020 that the IFPR will
come into force on 1 January 2022.
7. Policy background
What is being done and why?
7.1 Since July 2018, HM Treasury has been using the powers in the European Union
(Withdrawal) Act to ensure that the UK continues to have a functioning financial
services regulatory regime in all scenarios. There have been amendments made to EU
law which became operative in the period immediately before IPCD, and which have
become retained EU law under the EUWA on IPCD. Further statutory instruments
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under the EUWA are therefore necessary to deal with these changes to ensure the
UK’s regulatory regime works in the UK context. The powers to make these
amendments are available for two years following IPCD.
7.2 The EUWA repeals the European Communities Act 1972 and converts into UK
domestic law the existing body of directly applicable EU law (including EU
Regulations). It also preserves UK laws relating to EU membership, such as
legislation implementing EU Directives. This body of law is referred to as “retained
EU law”. The EUWA gives ministers a power to prevent, remedy or mitigate any
failure of retained EU law to operate effectively, or any other deficiency in retained
EU law, through statutory instruments. Amendments made using powers in the
EUWA are not intended to make policy changes, other than to reflect the UK’s new
position outside of the EU.
7.3 As the content of this instrument is not covered by the UK-EU Trade and Cooperation
Agreement reached on 24 December 2020, it is right and necessary that further
statutory instruments under the EUWA are used to ensure the UK continues to have a
functioning financial services regulatory regime after EU exit. This instrument does
not seek to make policy changes, but instead smooth transition for UK commodities
dealers until the planned introduction of the IFPR, which will subject these firms to
new prudential rules.
8. European Union (Withdrawal) Act/Withdrawal of the United Kingdom from the
European Union
8.1 This instrument is being made using the power in section 8 of the European Union
(Withdrawal) Act 2018 in order to address failures of retained EU law to operate
effectively or other deficiencies arising from the withdrawal of the United Kingdom
from the European Union. In accordance with the requirements of that Act the
Minister has made the relevant statements as detailed in Part 2 of the Annex to this
Explanatory Memorandum.
