In March 2018, the UK and the EU reached an in principle agreement on the terms for an 'implementation' period intended to operate from the date of the UK's exit from the EU (29 March 2019 – the exit date) until the end of December 2020 as part of the draft wider UK withdrawal settlement. That agreement envisages that the UK would continue to comply with EU law during this period, and that regulated firms and investment funds would continue to benefit from passporting between the UK and the EEA as they do today.
However, as the exit date draws nearer there continues to be little certainty around the wider withdrawal settlement, on which the implementation period depends. In a scenario where exit takes place from the EU with no agreed withdrawal arrangements in place and so no mutual implementation / transition period (a "no-deal Brexit"), there could be considerable disruption. EEA firms currently benefiting from passport rights in the UK would no longer be entitled to operate in the UK without a new UK authorisation and UK firms currently passporting into the EEA would likewise find themselves having to seek fresh EEA authorisations.
In December 2017, the UK Government announced that, if necessary (i.e. in the absence of an agreed implementation period), it would introduce a temporary permissions regime for inbound passporting EEA firms and funds to allow them to continue operating in the UK for a limited period after the exit date and to continue temporarily marketing in the UK.
The Treasury published the first piece of draft legislation to establish such an interim authorisation/permissions regime at the end of July, just before Parliament closed for the summer recess. This draft legislation focuses on financial services firms requiring authorisation under the Financial Services and Markets Act (FSMA). Further draft legislation focussing specifically on, inter alia, payments/e-money institutions and investment funds is yet to come. The UK regulatory authorities (the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA)) have also published updates (FCA guidance, PRA guidance) setting out in more detail how they envisage this temporary regime would operate, including some matters for which the detailed draft legislation has yet to be produced.
This regime would apply only for inbound EEA firms and funds. There is no guarantee that, if no implementation period agreement and/or wider exit settlement is reached, EEA countries will apply similar regimes for the benefit of UK firms and Funds with EEA activities, although clearly the UK Government is hopeful of reciprocal arrangements.
Which EEA firms will be entitled to use the regime?
The temporary regime, if implemented, will be available to:
- EEA firms which have passports in place before the exit date, including firms with top-up permission.
- Treaty firms (EEA firms carrying on regulated activities outside the single market directives) which qualify for authorisation before the exit date, including firms with top-up permission.
- Electronic money and payment institutions who are exercising their passporting rights under the Electronic Money Directive (EMD) or the Payment Services Directive (PSD2) before the exit date.
- EEA-domiciled UCITS funds and AIFs who have given notification of their intention to market in the UK under the relevant passport prior to the exit date; and
- Credit institutions and insurers.
Similar transitional regimes will also be provided for other EEA payment institutions and EEA electronic money institutions.
There will also be separate arrangements for EEA firms and funds which fall outside the scope of the temporary permissions regime (such as those which are currently operating cross-border outside the passporting framework). However, details for these arrangements have yet to emerge.
Gibraltar-based firms will not need to use the temporary permissions regime and will be able to continue to operate as they do now post-Brexit, until 2020 (with a replacement framework for Gibraltar based firms envisaged for after 2020).
How will the regime apply for EEA financial services firms?
The FCA has set out in reasonable detail how it envisages the transitional regime applying for EEA firms. Firms with the Prudential Regulatory Authority (PRA) as their primary regulator may need to wait longer for detailed guidance.
Under the envisaged regime EEA financial services firms currently passporting into the UK will be able to gain temporary permissions for the same scope of activities as was allowed by their pre-Brexit passport.
Firms will need to give notice that they wish to use the temporary permissions regime. The FCA has confirmed that this will be an online process with the notification window expected to open in early January 2019 and closing prior to the exit date. The draft legislation extends the usual statutory deadlines for dealing with such applications to three years from the exit date to help the regulators manage the anticipated flow of applications. The FCA envisages that it will manage applications by allocating firms a period (a 'landing slot') within which they will need to submit their application for UK authorisation (or, in the case of firms currently authorised in the UK with "top-up permissions", for a variation of permissions rather than an authorisation). After the exit date, the FCA will confirm firms' landing slots so they can start to prepare their applications. The first landing slot is expected to run from October to December 2019 and the last to run from January to March 2021. This is a broadly similar approach to that taken by the FCA when it took over regulation of Consumer Credit firms, which proved a relatively orderly transition.
As EEA firms in the regime will have full UK authorisations, they will come within the full scope of the relevant UK Regulator's supervision and rule-making powers. However, the FCA has indicated that it will seek to preserve the status quo as much as possible to enable a smooth transition. For example, for matters previously reserved to the firm's home state the FCA intends to accept 'substituted compliance' (allowing the EEA firms to continue to comply with the equivalent home state rules in respect of their UK business). However, the FCA does not intend to apply any home state rules which relate to capital requirements.
The Financial Services Compensation Scheme (FSCS) will be extended to cover UK branches (with limited exceptions) during the temporary permission regime. Accordingly, customers of EEA firms that are in the regime and have UK branches will have FSCS protection equivalent to the cover provided to customers of UK firms (and the EEA firms will be required to contribute to FSCS). Customers of EEA firms in the regime without a UK branch will generally not have access to the FSCS, other than where this already applies. The Financial Ombudsman Service, however, will apply to all firms in the regime, including those without a UK branch. These firms will therefore be required to pay case fees and annual levies.
How the regime will apply for Funds
The FCA has indicated that it expects any transitional regime to work in a similar way for funds that EEA managers are ready to market prior to the exit date. In such cases managers will be able to give notice that they wish to continue to market in the UK before the exit date. The FCA expects to start accepting notifications in early January 2019 and the notification window will close prior to the exit date. Once the notification window has closed, EEA fund managers that have not submitted a notification for a fund will be unable to use the temporary permissions regime for that fund and so will not be able to continue marketing it in the UK. New funds developed and coming to market after the exit date will not be eligible to use this temporary marketing passport. Presumably for such funds the UK third country private placement regimes will apply.
What do firms and funds need to do?
There is no certainty that this regime will be implemented. As noted above, this is intended to apply only in the event that there is no implementation period. However, for EEA firms engaged in scenario planning this does give some visibility on the 'fall back' position for a 'no-deal' Brexit.
Firms do not need to do anything now other than read the PRA and FCA guidance and complete the Regulators' online surveys, which are intended to help them identify and manage the anticipated level of applications for the regime. There will be a further consultation in the autumn on the proposed rules and fees to be paid under the regime.
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.