On July 24, 2018, HM Treasury published a draft of the EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018 (the draft Regulations) which provide for a temporary permissions regime enabling EEA passporting firms to continue operating in the UK for a limited period of time once the UK leaves the EU.
Whilst further details about the new regime will be published over the coming months, this note covers what we know so far.
Why publish the draft regulations?
Simply put, the temporary permissions regime is a back-stop should the EU and UK not finalise the Withdrawal Agreement.
In December last year HM Treasury announced that, if necessary, the UK Government would legislate for a temporary permissions regime and both the PRA and FCA referred to it in their respective statements on Brexit preparation which were published at the same time. In its statement the PRA referred to the temporary permissions regime as a “fall-back” in a no deal, hard Brexit scenario.
At 11pm on March 29, 2019 (Brexit Day) the UK will leave the EU per Article 50 of the Treaty of the European Union. If the Withdrawal Agreement is ratified by both sides in accordance with their own procedures a transition period (also known as an implementation period) will take effect allowing market access on the current basis until December 31, 2020 (i.e. UK firms would have access to the EU Single Market, and EEA firms would have access to the UK market).
However, if the Withdrawal Agreement is not ratified before Brexit Day there will be no transition period and EEA firms would suddenly not be able to operate in the UK without UK authorisation and this may cause major disruption. Therefore, the temporary permissions regime is designed to mitigate the so-called “cliff-edge” effects of this scenario in the UK. Importantly it is only required in a no-deal scenario.
We already saw the FCA conduct preparatory work for the temporary permissions regime earlier this year. In March, it published a new page on its website asking UK inbound firms and funds to complete an online survey so that it could easily identify such firms.
Does the temporary permissions regime help UK firms operating in the EEA?
The short answer to this question is "no". The UK regulatory authorities have called on the EU authorities to reciprocate but so far they have not done so. Instead the EU authorities have issued statements concerning the need for UK institutions to submit their application for authorisation in the relevant Member State before the end of Q2 2018. In light of this UK firms have been conducting analysis as to whether their operations fall within the regulatory perimeter of the EEA state in which they operate and, if so, whether they need to seek authorisation.
Is temporary permission a novel thing in the UK?
A form of temporary or limited permission is nothing new in the UK financial services industry. For example, when the FCA took over the regulation of consumer credit from the Office of Fair Trading a couple of years ago it introduced a limited permissions regime for a set period of time. In addition, in its June consultation paper concerning its proposed regulation of claims management companies the FCA is also proposing a temporary permissions regime for those claims management companies that are currently regulated by the Claims Management Regulator.
What message does the temporary permissions regime send to EEA firms?
Essentially, the regime allows EEA firms to operate in the UK for a limited period of time after Brexit Day while they seek authorisation in the UK. By issuing the draft Regulations now, the UK Government is sending a message to EEA firms that they can plan on the assumption that full UK authorisation will not be needed by Brexit Day in the event of a no deal scenario.
Which EEA firms are eligible?
To be eligible for entry into the temporary permissions regime EEA firms must be authorised to carry on regulated activities in the UK under the EU passporting regime. This includes EEA firms passporting under the EU Single Market Directives who qualify for authorisation under Schedule 3 to the Financial Services and Markets Act 2000 (FSMA). So called “Treaty firms”, those who exercise EU Treaty rights to do business on a cross-border basis in the absence of passporting rights, who qualify for authorisation under Schedule 4 to FSMA, are also eligible for the temporary permissions regime.
Significantly, the temporary permissions regime does not apply automatically to the above firms. They must make the relevant notification/application to the relevant UK regulator (PRA for credit institutions, insurance firms and significant investment firms and FCA for all other firms) before Brexit Day (see below on when to apply).
What types of EEA firms are not covered by the regime?
The draft Regulations do not cover EEA payment institutions, electronic money issuers and EEA funds that are marketed into the UK. However, HM Treasury has said that it intends to provide for a similar temporary regime for these entities under separate pieces of legislation. It is not yet clear how regulated markets will be treated. This connects to the broader discussion on the UK overseas person exclusion.
What does it mean to be in the temporary permissions regime?
Once an EEA firm is in the temporary permissions regime the FCA and PRA will have the same powers in relation to them as if they were authorised under Part 4A of FSMA. Firms would be subject to the same obligations and supervisory framework as if they were a Part 4A FSMA authorised firm.
Membership of the Financial Services Compensation Scheme (FSCS) will be extended to all EEA deposit-takers and insurers in the regime with a branch in the UK. Firms in the temporary permissions regime without a branch in the UK will be outside the scope of the FSCS, with the exception of EEA insurers that currently operate in the UK via a passport but without a branch, which will retain their existing FSCS membership whilst in the regime. A consultation on the broader approach to FSCS protection will be published later this year.
The FCA has a page on its website called “The temporary permissions regime for inbound passporting EEA firms and funds – our approach”. On this page the FCA describes, among other things, the rules that will apply to firms in the regime. In addition to the FSCS, it covers the senior managers’ regime, client assets, status disclosure and the Financial Ombudsman Service.
The FCA’s starting point for firms is that they will need to comply with
- All FCA Handbook rules and guidance which currently apply to them.
- All FCA Handbook rules which implement a requirement of an EU Directive which are currently reserved to the home Member State (and which therefore the FCA does not currently apply to EEA firms). The FCA intends to accept “substituted compliance” in respect of these rules. This means that if firms can demonstrate they continue to comply with the equivalent home Member State rules in respect of their UK business they will be deemed to comply with the FCA’s rules and guidance. The FCA is not proposing to apply any home Member State rules which relate to capital and related requirements.
- Certain additional FCA Handbook rules will be applied where the regulator believes it should provide appropriate consumer protection. Such additional requirements have not yet been specified.
HM Treasury intends to give the UK regulators power to grant transitional relief so that they can phase in their post-Brexit Day requirements to give firms some flexibility.
Senior managers’ regime
The extension of the senior managers’ regime to non-banking institutions is a significant regulatory reform in the UK. The new FCA rules come into force on December 9, 2019.
The FCA states that it will propose that, whilst in the temporary permissions regime, EEA firms with UK branches should continue to comply with the requirements in relation to Approved Persons that currently apply to them, and then comply with the requirements of the senior managers’ regime which are currently stated to apply to EEA branches when the new requirements come into force (December 9, 2019).
The senior managers’ regime already applies to banks operating in the UK with the PRA being the lead authority for most senior management functions. However, the PRA has not yet said how this development may affect it.
When to apply
The FCA states that firms do not need to do anything now other than complete its online survey. It adds that the notification process will be an online process and it expects to open a “notification window” in early January. The notification window will close prior to Brexit Day.
The PRA states that firms may either make a notification to it (if the firm has not submitted an application for authorisation before Brexit Day) or make an application for authorisation which is submitted before Brexit Day (applications submitted before the draft Regulations are finalised would also be sufficient).
What about applications for authorisation?
The temporary permissions regime will be in place for three years, starting when the UK leaves the EU (i.e. Brexit Day). HM Treasury has the power to extend the regime by up to one year at a time.
The draft Regulations temporarily extend the statutory time limits for the UK regulators to process authorisation applications from EEA passporting firms from six and twelve months for complete and incomplete applications respectively to three years from Brexit Day.
The FCA states that it will allocate firms a “landing slot” within which they will need to submit their application for authorisation. Landing slots will be confirmed after Brexit Day and the regulator expects the first one to be October to December 2019 and the last to be January to March 2021.
What about EEA firms with top up permissions?
Incoming EEA firms with top-up permissions (firms with UK regulatory permissions in addition to their passported activities) will be able to continue to operate under their current scope of permissions during the temporary permissions regime. As they already have some UK regulatory permissions, they will need to submit a Variation of Permissions application rather than an application for authorisation.
Which regulator should an EEA firm approach?
The PRA is the lead regulator for EEA credit institutions, significant investment firms and insurers and therefore these types of firms should contact it. However, the FCA is the lead regulator for conduct matters for these firms (hence they are known as dual regulated) and therefore the materials that it produces will also be important. There is one important exception to this in respect of EEA credit institutions that do not accept deposits in the UK; such firms will need to approach the FCA. All other incoming EEA firms will need to approach the FCA.
When can we expect to see further information?
The FCA and PRA expect to issue consultation papers in the autumn setting out further details on the changes they propose to make to their Handbook / Rulebook including the level of fees to be paid by firms in the temporary permissions regime. The FCA has said that following the consultation it will publish the final rules “early next year”.
And finally, what about CCPs and financial market infrastructure?
HM Treasury has also published a draft of The Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018 (the draft CCPs Regulations). The purpose of the draft Regulations is to ensure that the regulatory regime for central counterparties (CCPs) established by the EU Regulation on over-the-counter derivatives, CCPs and trade repositories (EMIR) functions effectively after Brexit, once EMIR has been retained in UK law.
Essentially the draft CCPs Regulations
- Transfer the European Securities and Markets Authority’s functions relating to the recognition of third country CCPs to the Bank of England and amend Part 18 of FSMA where necessary.
- Give the Bank of England powers to receive applications and assess and make decisions on the recognition of non-UK CCPs before exit – with those decisions taking effect on Brexit Day as if they were made under Article 25 of EMIR.
- Create a temporary recognition regime which enables third country CCPs to continue their activities in the UK for a limited period after Brexit Day if they are currently able to provide those activities in the EU under EMIR, and have notified the Bank of England (before Brexit Day) that they intend to continue doing so in the UK.
- Enable the Bank of England to charge fees from non-UK CCPs that are providing services to the UK.
In relation to the temporary recognition regime, the Bank of England confirms that to enter into it non-UK CCPs will need to inform the Bank of England before Brexit Day. They can either do this by a notification or by submitting an application for recognition before Brexit Day. CCPs in the temporary recognition regime will be deemed to be recognised to provide clearing services in the UK for a maximum of three years, extendable by HM Treasury in increments of twelve months. CCPs that have not already submitted an application for recognition must do so within six months of the start of the temporary permissions regime.
In terms of financial market infrastructure it is worth noting that on July 24, 2018, the Bank of England published a Dear CEO letter setting out how it envisages the future UK framework for settlement finality designation of EU systems. This includes a temporary designation regime.
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