This week we bring the final blog post in this 4 part series, taking a look at ‘Brexit for Financial Services Firms’. The UK financial regulators (the Financial Conduct Authority (FCA) and Prudential Authority (PRA)) in their preparation for a “no-deal” Brexit have published three consultation papers in October: FCA, CP 18/28: “Brexit: proposed changes to the Handbook and Binding Technical Standards – first consultation” FCA, CP 18/29: “Temporary permissions regime for inbound firms and funds” PRA, CP 26/18: “UK withdrawal from the EU: Changes to PRA Rulebook and onshored Binding Technical Standards”
These consultation papers are particularly relevant for European Economic Area (EEA) regulated financial services firms which use “pass-porting” to sell their products and services into the UK. Although these documents are for consultation at this stage, they will form the basis of the regulatory framework for financial services firms once finalised and consideration of these should form the basis of Brexit contingency planning for the 8000 EEA entities that hold authorisations from their home regulator to do business in the UK.
Firms these are relevant to include:
- EEA firms that are pass-porting into the UK under FSMA.
- EEA electronic money and payment institutions and registered account information service providers pass-porting into the UK
- Managers of EEA-domiciled UCITS (Undertakings for Investments in Transferable Securities) that market those funds in the UK
- Managers of EEA-domiciled investment funds (AIFs), including European Venture Capital Funds (EuVECAs), European Social Entrepreneurship Funds (EuSEFs), European Long-Term Investment Funds (ELTIFs)
It is important to note that these consultation papers do not directly apply to equivalent UK financial services firm (which are already authorised by the UK regulators) selling their products and services into EEA – which will require reciprocal policy formulation from EU regulators (and in some cases national regulators). “Pass-porting” refers to the ability of a financial services firm that is regulated by its home state regulator within the EEA to market its products and services to customers in other EEA member countries (e.g. a Luxembourg based and regulated investment fund marketing products to customers in the UK currently would, broadly speaking, not require authorisation by the UK regulators). After Brexit, this “pass-porting” regime will change.
If there is a “deal”: The FCA is operating under the assumption that in the event there is a deal, the current regulatory environment will continue to apply to both UK and EEA financial services firms during an agreed transitional period from 29 March 2019 to 31 December 2020. This period would provide financial services firms with time to understand the implications of Brexit on their activities. Greater clarity as to regulation would emerge at the time of those negotiations between the UK and EU during the transitional period, but the approach of the FCA adopted in these consultation papers will potentially form the basis of its authorisation and regulation of EEA financial services firms post 31 December 2020. As such, firms and funds should continue with plans to implement EU legislation that is still to come into effect before the end of December 2020 (the end of the proposed transition period).
If there is “no deal”: In the event of “no deal”, the FCA aims to roll out its Temporary Permissions Regime(s) (“TPR”). The TPR will enable firms and funds currently “pass-porting” into the UK to continue their activities in the UK for a limited time after exit (currently listed as being a maximum of 3 years from 29 March 2019). These temporary regimes will allow time for those firms that wish to maintain their business in the UK to obtain full UK authorisation (as they are not able to rely on “pass-porting”. The TPR Regulations (covering pass-porting), TPR Payments Regulation (covering EEA electronic money and payment institutions) and TPR Funds Regulation (for investment funds and their managers) are currently in front of Parliament for approval. The TPR aims to reduce the risk of harm associated with an abrupt loss of permission by enabling firms that passport into the UK to undertake new business that falls within the scope of their existing permissions, continue to perform their contractual rights and obligations and manage existing business. It will allow relevant EEA-domiciled investment funds to continue to be marketed in the UK to new and existing investors.
Temporary Permissions Regime checklist (for now)
- EEA financial services firms will before 29 March 2019 need to notify the relevant regulator of their wish to be treated as if they have permission to carry on the relevant regulated activities in the UK on a temporary basis while in the TPR.
- Proposed amendments in the consultation papers will apply to the relevant FCA Handbooks particularly in relation to EU-derived provisions which will be incorporated into UK law so that they function effectively after exit day. Firms will need to comply with these during the TPR phase.