European Union: UK Regulator Consults On Post-Brexit Temporary Permissions Regime For EEA Firms And Funds

On October 10, 2018, the FCA published a consultation on its proposed approach to a TPR for EEA firms and investment funds that currently provide services in the U.K.—either via a branch or cross-border—pursuant to a single market passport. The proposed TPR is designed to minimize the potential harm caused by an abrupt loss of the passport in a "no-deal" scenario, in which the U.K. exits the EU without a ratified Withdrawal Agreement, which would mean that there would be no transitional period following Brexit and that the U.K. would be treated as a third-country after exit day. The TPR will enable EEA firms and investment funds to continue to provide services in the U.K. for a limited period following exit day.

The proposed TPR will take effect on March 29, 2019 in the event of no deal. Should the U.K. and EU negotiations lead to ratification of the Withdrawal Agreement, the TPR will not enter into force. Instead, during the transitional period, firms and investment funds would continue to have access to the same passporting arrangements as they do now.

HM Treasury laid the draft TPR Regulations before Parliament in September 2018. Its provisions make the required changes to the U.K.'s legal and regulatory framework to create the TPR for EEA firms that passport into the U.K. and EEA firms that are outside the passporting framework but that operate in the U.K. through the exercise of so-called "Treaty Rights." On October 10, 2018, HM Treasury also published drafts of: (i) the Alternative Investment Fund Managers (Amendment) (EU Exit) Regulations 2018; and (ii) the Collective Investment Schemes (Amendment etc) (EU Exit) Regulations 2018. These draft statutory instruments establish TPRs for investment funds and fund managers.

The FCA must make the necessary changes to its Handbook to apply appropriate rules to firms and funds in the TPR. The consultation provides the background to, and an overview of, the TPR and explains how the regime will operate for firms and investment funds, including details of the firms, funds and fund managers that will be eligible to enter the TPR. The consultation paper also sets out additional information for e-money institutions, payment institutions and registered account information service providers. Some FCA rules apply to these firms but most of the rules that will apply to them are set out in a separate TPR for Payment Firms, which will be introduced under the proposed Electronic Money, Payment Services and Payment Systems (Amendment and Transitional Provisions) (EU Exit) Regulations 2018.

The TPR will be available for:

  1. EEA firms that qualify for authorization before exit day to carry on a regulated activity in the U.K. in line with Schedule 3 of FSMA;
  2. Treaty firms that qualify for authorization before exit day to carry on a regulated activity in the U.K. in line with Schedule 4 of FSMA;
  3. EEA firms or Treaty firms as above but with a "top-up" permission;
  4. EEA authorized payment institutions and EEA registered account information service providers that, before exit day, are entitled to offer payment services in the U.K. in the exercise of a passport right;
  5. EEA authorized electronic money institutions that, before exit day, are entitled to offer electronic money issuance, redemption, distribution or payment services in the U.K. in the exercise of a passport right;
  6. EEA-domiciled UCITS funds that have been recognized under FSMA to market to all investors in the U.K.;
  7. EEA-domiciled Alternative Investment Funds (AIFs) that are entitled to be marketed to professional investors in the U.K. under the Alternative Investment Fund Managers Regulations 2013, following receipt by the FCA of a regulator's notice or following approval by the FCA, where required;
  8. EU Venture Capital Funds (EuVECAs) and EU Social Entrepreneurship Funds (EuSEFs) that, immediately before exit day, have been notified to the FCA for marketing in the U.K. in line with the EuVECA Regulation or the EuSEF Regulation; and
  9. EU Long-Term Investment Funds (EuLTIFs) which are entitled to be marketed to all investors, or to professional investors only, in line with the notification procedures for AIFs.

The TPR will not be available for other types of entities that do not use the same means to access the U.K. market. These include credit-rating agencies, trade repositories and DRSPs. The FCA has made information available separately on the arrangements for these entities. Similarly, separate arrangements will apply to market operators and CCPs, although there is no TPR announced for regulated markets or direct insurers or assurance firms. The government has committed to legislate, if necessary, to ensure that contractual obligations (such as under insurance contracts) between EEA firms and U.K.-based customers that are not covered by a TPR can continue to be met.

The FCA clarifies that incoming EEA credit institutions that are intending to continue to accept deposits in the U.K. after exit day and insurers will need to be authorized by the PRA. These firms should contact the PRA if they have not already done so, but, given that they will also be subject to the FCA's rules, they should also take note of the consultation proposals.

The overall aim of the FCA's proposals is to preserve the status quo as much as possible, so that firms and funds in the TPR will generally need to comply with the same rules as currently. The FCA is seeking specific feedback on:

  1. How it will apply its rules to firms and investment funds in the TPR. The consultation proposals relate to: (i) the FCA's Principles for Businesses; (ii) new rules in the General Provisions sourcebook (GEN) setting out the general approach for rules that will apply to firms in the TPR; (iii) new rules to be added to GEN setting out the general approach for rules that will apply to marketing of EEA-domiciled investment funds in the TPR; (iv) a new chapter in the Client Assets sourcebook for the rules applicable to firms in the TPR (CASS 14); and (v) funding the Single Financial Guidance Body and the Illegal Money Lending levy.
  2. Proposals for how the TPR will be funded. The FCA proposes that the TPR is funded by periodic fees from firms and funds in the regime, generally on the same basis as U.K. firms. Additionally, the FCA proposes to levy special project fees from individual firms in the regime, to recover its exceptional supervisory costs where a firm undertakes certain restructuring transactions.

Comments on the consultation proposals are invited by December 7, 2018. The consultation is open for only eight weeks to ensure that the FCA has sufficient time to incorporate comments from stakeholders ahead of exit day. The FCA intends to publish feedback to the consultation responses and to finalize its proposals early in 2019. The FCA expects to open the TPR notification window in early 2019 and to close it before exit day. The FCA will confirm the exact dates and times in due course.

The consultation paper (FCA CP 18/29) is available at: https://www.fca.org.uk/publication/consultation/cp18-29.pdf, details of the draft EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018 are available at: https://finreg.shearman.com/uk-secondary-legislation-published-for-post-brexi, details of the temporary recognition regime for CCPs are available at: https://finreg.shearman.com/uk-legislation-published-for-a-post-brexit-recogn and details of the FCA's approach to EEA market operators seeking to apply to become recognized overseas investment exchanges are available at: https://finreg.shearman.com/uk-regulator-publishes-application-requirements-f.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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