The FCA’s consultation on the temporary permissions regime
On October 10, 2018, the FCA published Consultation Paper 18/29: Temporary permissions regime for inbound firms and funds (CP18/29). As part of its contingency planning for a hard Brexit (where there is no agreement on the Withdrawal Agreement) HM Treasury is legislating for a temporary permissions regime (TPR) that will allow, for a limited period of time, after Brexit day: (i) EEA firms that currently passport into the UK to continue conducting business in the UK; and (ii) managers of UCITS funds and managers of alternative investment funds that market their funds in the UK, to continue marketing such funds in the UK. In CP18/29 the FCA sets out how it expects the TPR to work in practice, including its duration and the applicable rules that will apply once a firm has entered the regime. The deadline for comments on CP18/29 is December 7, 2018.
Should a firm be applying now to enter into the TPR?
Should a firm wish to take advantage of the TPR it needs to make the appropriate notification to the FCA. However, the notification window will not open until early 2019. It will close before Brexit day (the FCA states that it will confirm exact dates and times in due course). The FCA expects notifications to be an online process using the Connect system. Once the notification window has closed, firms that have not submitted a notification will not be able to use the TPR.
How long does the TPR last?
There has been talk in the market that it lasts for three years. That is not quite the case. The FCA states in CP18/29 that it will last for a maximum of three years but this period will vary from firm to firm depending on when they are asked to submit their application for full authorisation in the UK and leave the TPR. The important point to note is that at some stage during the three years of the TPR a firm will be asked to apply for full FCA authorisation.
How soon will a firm in the TPR be asked to apply for full authorisation?
For some firms it may be sooner than they think. In CP18/29 the FCA talks about allocating firms within the TPR (TP firms) "landing slots" to submit their application for authorisation. A landing slot will be a set three month period in which a TP firm will need to submit its application for authorisation. The FCA states that it will issue a direction shortly after Brexit day setting out which TP firms have been allocated to each landing slot. The regulator will also write to TP firms confirming their particular landing slot. The FCA anticipates that the first landing slot will be October to December 2019 followed by a further five landing slots with the last one closing at the end of March 2021.
Can a firm change its landing slot?
Probably not. The FCA states that changes to landing slots will not be possible unless “exceptional circumstances” apply. The reality is that the FCA needs TP firms to apply during their allocated landing slot in order to deal with the volume of applications it expects to receive. If you look back at the temporary permissions regime which was introduced for consumer credit, there were a few situations where firms applied for a different date, but it’s going to be very much the exception.
Can a firm change its activities during the TPR?
The short answer to this is "no", which means that it is absolutely critical that a firm carefully thinks about its application. Where a TP firm wants to undertake further regulated activities, it will have to apply for these new activities as part of its overall application for full authorisation in the UK.
What happens if a firm does not want to apply for authorisation?
In this instance the TP firm would apply to cancel its temporary permission once it has ceased all UK regulated business.
Can the TPR be withdrawn from a firm?
Yes. Where a TP firm’s application for authorisation is refused by the FCA, its temporary permission will automatically come to an end based on the FCA decision notice.
What should firms that passport into the UK on a services basis be thinking about?
Firms that passport on a services basis will be able to use the TPR and carry on business under that regime. The real question for these firms is what happens after the TPR as it seems that when seeking full authorisation the FCA may not be catering for a services option. In light of this, services firms should be thinking about the following issues. First, could it conduct business in the UK under the overseas persons exclusion in the Regulated Activities Order. If not, then consideration needs to be given as to establishing a branch or subsidiary in the UK.
What FCA rules will apply?
The FCA’s proposals are what the market expected, TP firms will be subject to those FCA rules that currently apply to them passporting into the UK.
TP firms will also be subject to FCA rules that implement a requirement of an EU Directive which are currently reserved to the TP firm’s home Member State. The FCA will accept substituted compliance if the TP firm can demonstrate that it continues to comply with the equivalent home Member State rules in respect of their UK business. How detailed a review the FCA will take before it will accept substituted compliance remains to be seen. At the very least it is presumed that it will not apply where a home Member State has not implemented an equivalent rule. Given that EU Directive requirements are often not uniformly implemented across all Member States, substituted compliance may not be as useful as it first seems.
TP firms will also be subject to certain additional requirements, these will include the Principles for Businesses and certain reporting requirements.
Principles for businesses
The FCA will apply the Principles for Businesses in full to TP firms. The one exception to this is Principle 4 (financial prudence). The FCA is not proposing to apply any home state rules which apply to capital adequacy (including both capital resources and liquidity resources). However, where any capital adequacy resources rules apply to a TP firm before Brexit day, they would be carried over and continue to apply once the firm is in the TPR. The FCA’s position on capital adequacy has raised some eyebrows in the sense that the regulator appears to be relying on home Member State supervision in a no deal scenario where there is no legal framework to do so. It may be that the PRA will say more on this in the future.
Another important point concerns Principle 11 (relations with regulators). Principle 11 requires firms to deal with their regulators in an open and cooperative way, and to disclose to them appropriately anything relating to the firm of which that regulator would reasonably expect notice. The impact of this Principle will be that TP firms will need to be open and cooperative with the UK regulators and tell them anything they would reasonably expect notice of. In addition, the scope of Principle 11 is not reduced by substituted compliance or where an FCA rule does not apply to a TP firm. The FCA states: “where a notification requirement does not apply to a TP firm or can be satisfied by notifying the TP firm’s home state regulator because of substituted compliance, that does not limit the scope of Principle 11, and TP firms should notify us of anything which falls within the requirements of that Principle as drafted.”
For TP firms that hold or receive client assets, there will be some new rules. These will be set out in a new chapter 14 of the client assets sourcebook (CASS). The FCA is not applying all of the rules in CASS to TP firms, instead it is introducing certain reporting and disclosure requirements. In particular, the FCA is proposing to require TP firms to report to it their client assets arrangements. The frequency of reporting will depend on the TP firm’s business type and size of client assets holdings.TP firms will report to the FCA at the same frequencies and within the same submission deadlines for FCA authorised firms. The reporting period will start from April 1, 2019.
The FCA has also commented on the application of the senior managers and certification regime (SM&CR) to TP firms. For dual regulated EEA branch firms, the FCA will maintain its current SM&CR requirements as they apply to EEA branch firms throughout a TP firm’s time in the TPR. The SM&CR requirements as they apply to third country firms will be turned on once the TP firm has been fully authorised as a third country branch. For solo regulated firms, the approved persons regime as it applies to EEA branch firms before Brexit day will apply to TP firms. When the SM&CR is rolled out to solo regulated firms at the end of next year the existing approved persons regime functions will be converted into SM&CR functions for EEA branch firms. Once a solo regulated TP firm becomes fully authorised the third country branch requirements of the SM&CR apply.
In terms of services firms, the FCA notes that the SM&CR and the approved persons regime does not apply and does not propose to change this when these firms move to the TPR. However, where the services firm opts to establish a third country branch or subsidiary, the applicable SM&CR requirements will apply.
Finally, how does the TPR work for funds?
An EEA fund manager will need to notify the FCA that they want a temporary permission to continue to market their investment funds to investors in the UK. The notification window is discussed above. Importantly, once the notification window is closed, fund managers that have not submitted a notification for a fund will not be able to market it in the UK after Brexit day via the TPR. Funds being marketed under the TPR will continue to be subject to the same UK rules that applied to them before Brexit day and the FCA will supervise them on that basis. The FCA will not supervise compliance with any rule that applies to the fund or the fund manager in their home Member State. Fund managers will be required to continue providing the FCA with updates to fund documents as required by section 264 of the Financial Services and Markets Act 2000 or the AIFM UK Regulations.
When in the TPR the fund manager cannot
Add any new schemes to the funds in the TPR.
Add new sub-funds to umbrella schemes in the TPR.
Change or extend the category of customer to be marketed to while a fund is in the TPR.
The FCA will allocate a landing slot within which the fund manager will need to submit its applications for recognition or, where relevant, notification of EEA domiciled funds.